Dominic Coyle answers your finance questions

First Active merger concerns

Having not realised:

1) that First Active had sold some of my shares during the summer (payment goes automatically into an account I don't look at, vaguely remember some mailshot);

2) the deadline for CGT has changed and is now the end of this month;

3) because the shares are in my name, I can't use my husband's CGT allowance,

I now realise that I better sort out this year's CGT before next year's hits. My question to you is with regards calculating CGT. I availed of free shares but I also bought shares, how do I calculate the CGT for this year. Do I calculate it based upon my free shares being sold or the shares I bought being sold or do I split it 50/50? Ms H. McK, email

I doubt you are alone in learning late of the changing rules regarding capital gains tax (CGT), which is now payable at the end of October for gains made in the first nine months of 2003 - along with the payment for 2002.

Just one thing to put straight. First Active did not sell any of your shares in the summer. What happened was that it sold its British operation and found itself with a surfeit of cash that it could not use.

As a result, it was decided to disburse this money to its shareholders through a capital reduction.

This amounted to €1.12 for every share you held but did not involve the sale of any of those shares.

However, if the €1.12 payment per share brings your capital gain on First Active and other assets combined above the €1,270 limit, you will be liable for capital gains tax payable by October 31st.

Turning to the substantive point of your query, there is no question of any of your shares - free or paid for - being sold as part of the capital reduction programme.

In general terms though, if you have shares bought at different times and you then sell these shares at different stages, the rule is "first-in, first-out".

So the shares you bought (or got for free) first are deemed to be the ones that you sell before anything else.

With the Royal Bank of Scotland deal, it's immaterial. Assuming the deal goes through, all your shares will be sold to Royal Bank of Scotland at the offer price of €6.20.

In terms of capital gains, the free shares will have a purchase price of zero and therefore the full €6.20 a share is a capital gain. In relation to the shares you bought, you will be able to index the purchase price to take account of inflation from the time they were bought until the end of 2002.

The Revenue sets down multipliers that are used for the purpose.

You can also deduct any costs involved in buying the shares before working out what the capital gain is, for instance broker commissions.

One other important point worth noting is that those First Active investors who still have investment losses arising from the Eircom debacle will be able to use those losses to offset any gain arising on this deal before assessing any capital gains tax liability.

Any capital gain arising from the sale of the shares to Royal Bank of Scotland as part of this deal will not kick in until 2004, as the deal will not close until January.

So you will have until October 31st, 2004, to settle any capital gains tax due.

I'm sure you are being bombarded with queries re First Active. I was considering re-mortgaging with First Active this month. Should I hold off until the merger goes through? Mr P.C., email

There is no particular reason why you should hold off. However, you will need to go through the range of mortgage rates on offer again in the light of this new information.

Royal Bank of Scotland, which also owns Ulster Bank in Ireland, says that it will be running the First Active and Ulster brands on a standalone basis.

That may be so but they will be run out of the same back office and, naturally, there will be a lot of crossover.

I would suggest that you look at the rates on offer by Ulster Bank to get a reasonable idea of what rates might be on offer.

As it happens, First Active has not been noted for its competitive mortgage rates - notwithstanding the fact that mortgages were its primary business.

The mortgage table produced in last week's Irish Times shows Ulster with a variable mortgage rate of 3.5 per cent and First Active offering 3.53 per cent. Its fixed rates look more competitive as well.

However, it is worth noting that both are well below the market leading 3.3 per cent variable rate that is offered by AIB.

Tax due on share schemes

I think you may have given some incorrect information in your response to question re Employee ESOP. We operate a Revenue approved ESOP with the three-year rule. Under the rules, no income tax is payable if the shares are held in trust for three years and CGT is assessed on the difference between the value of the shares when allocated and the value when sold.

Mr J.G., email

You are quite right. The scheme referred to last week, which was a Revenue Approved Profit Sharing Scheme, works with trustees buying shares on behalf of employees with cash payments made on the employees' behalf by the company.

As Mr Liam Doyle of PricewaterhouseCoopers explained to me, the money used by the company to buy the shares is not subject to income tax, even though it is effectively a form of pay for the employee, as long as the shares are held in trust for three years following their acquisition.

The shares pass to the individual employee at the end of the three-year lock-in period. However, when the employee goes to sell them, they are subject to capital gains. This is calculated by deducting from the sale price, the original acquisition price of the shares at the time they entered the trust - and not, as I said last week, a nil acquisition cost.

The employee will have been informed of this price at the time of the original purchase in the same way that they are made aware of their other income from their job.

An advantage for the company is that the amounts used to buy shares or for the costs involved in running the scheme will be allowable against income before calculating its liability for corporation tax. However, the revenue does lay down strict rules for schemes seeking its approval and the associated tax efficiencies. However, an issue for employers from the end of this year is the introduction of PRSI on such payments, which will be seen as benefit in kind. It remains to be seen if the Minister for Finance Mr McCreevy makes allowances for this in the forthcoming Budget.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.