Tax on annuities

Formerly self-employed, I now depend upon a gross annuity of £20,000, which is forwarded to me minus the standard rate of withholding tax in monthly instalments by Irish Life. This system of taxation ensures that I have to await a cheque from the Revenue for tax overpayment up to the end of each tax year. I have been told that a new and fairer system of tax deduction is to apply to annuitants such as I from January 1st, 2002. Can you please explain this in simple terms?

Mr D.M., Kerry

The difference is that, from next month, you will join the Pay As You Earn system in relation to your annuity. In other words, the details of the annuity you receive will be forwarded to the Revenue and you will be taxed each month on your income, less any allowances due to you.

Until now that was not the case for annuitants who were formerly self-employed. As you say, you were paid your annuity each month net of the standard rate of tax with no credit for any allowances to which you might be entitled.

The new system will work in your favour but that is not universally the case. Basically, until now, the annuity provider simply deducted the standard rate from all self-employed annuitants monthly payments and handed it over as a lump sum to the Revenue. No details were provided as to the individuals in receipt of the annuities within this category and therefore the Revenue would not be able to gauge who got what and from where the money to fund the annuity initially came from.

In a case like yours, where you regularly applied to the Revenue for payment in relation to tax overpaid during the year (because of the no-recognition in the system of allowances due to you), the Revenue would be fully au fait with your affairs and you have nothing to fear. Instead, you will have less hassle because you should now receive the correct payment.

Of course, it is up to you to contact your local tax inspector and get a determination of allowances issued. You should do this as soon as possible. Between the change to the euro and the switch to calendar tax year, there is bound to be confusion in the Revenue this year - especially with regard to people like you who are essentially making new claims. As it is, you may find yourself waiting a couple of months into the new year to get your affairs sorted under the new regime but the sooner you act the faster they will be put in order.

Of course, some people will find themselves paying more tax under the new system. These are people who have had only the standard rate of tax deducted from their annuities but who should be paying the higher rate because of other income received.

Remember, until now, the Revenue did not know who precisely was receiving annuities in relation to former self-employment as the institutions forwarded the tax due as an anonymous lump sum. From January, the Revenue will be able to match each annuity with an individual. That bodes ill for some, especially those who may find themselves having to explain where they earned the money that is funding the annuity.

At least you won't have any such worries. Your previous and regular contact with the Revenue for rebates means your life should become easier.

Rights issues

What is the situation where a shareholder in an Irish-quoted company dies and, before probate is completed, a major rights issue is announced? Who can take up the valuable rights? Are rights sold and the proceeds (if any) lodged to the credit of the testators estate or otherwise?

Mr E.O'M, Dublin

As you state in further detail provided in your letter, there is considerable confusion regarding the situation you outline and I have to say that my experience in trying to get categorical answers reflects this confusion.

Essentially, the situation with rights issues is that shares are provisionally allotted to each shareholder in accordance with the terms of the issue. However, it also appears that Irish law dictates that dead people cannot acquire additional assets - a quite logical position on the face of it - although, apparently cash does not count as an asset for these purposes.

In general, three options are open to people in a rights issue:

the rights can be taken up by returning payment for the shares allocated to the individual shareholder;

the rights can be refused by signing to this effect and returning the form;

the issue can be ignored, in which case the shares outstanding after completion of the rights issue will be sold in the open market and the cash - if any, after expenses - will be forwarded to the shareholder or their estate.

As I understand it, having got information from two company registrars, the second option is not open to a deceased shareholder in that a dead person is in no position to sign any form surrendering their rights. Similarly, strictly speaking, a dead person cannot acquire further assets and therefore cannot take up the options.

That leaves us with only option three. However, having said that, both registrars indicated that the rights could be paid for by someone else on behalf of the shareholder. Essentially, the rule of thumb appears to be that registrars will not know a person is dead until probate has been granted. Up until that time, they will assume the person is alive. Who pays for the shares is of no import to them; from their point of view, regardless of the payee, the shares are issued in the name of the shareholder.

I am aware from your letter that this is not what happened in the case to which you refer and that the executors in that particular instance accepted that the rights were forfeit. All I can suggest is that they were understandably so upfront and insistent on presenting the full facts that the registrars were left in no doubt that the shareholder was dead and that the letter of the law must apply. From the information I have received, these shares should eventually be sold and the proceeds, if any, passed to the estate.

Once probate is granted, of course, the person to whom the original shares are bequeathed becomes the shareholder and is able to avail of any subsequent rights issue.

Given the problems arising in the case to which you allude in your letter, you also want to know what would happen to someone who does take up the rights but dies before they actually receive the share certificate. I am confident that in such a case the certificate will eventually arrive and properly become part of the estate of the deceased. After all, the shares were purchased during the lifetime of the shareholder so the complication referred to above re the interregnum period of probate do not arise.

Eircom

In your Q&A column on Friday last you answered a question concerning the indexation of the Eircom share price to calculate a capital loss. are you sure you are correct?

Mr V.D., e-mail

The sooner Eircom/Vodafone is consigned to history, the happier I will be. You are quite right to inquire about the answer on the use of indexation in questioning the loss for Eircom shareholders as a result of the Valentia deal.

The Revenue Commissioners have also been in touch to remind me that indexation cannot be used to increase an actual gain or loss, or convert a gain to a loss or a loss to a gain. Indexation does not apply where its operation would increase an actual gain or convert an actual loss into a gain, or increase an actual loss or convert an actual gain into a loss.

In the case of Eircom, using the indexation multiplier would self-evidently increase an actual loss and so is not allowed. Essentially, indexation only comes into it when you are looking to reduce a capital gains tax bill, but there must be gains there in the first place.

As a result, the loss on the Eircom portion of the share is 35.5 cents - the €1.69 base price following the split minus the €1.335 offered by Valentia apart from the three cent dividend. On the portion of Eircom now owned by Vodafone, the base price is $4.66 per Vodafone share.

Sorry for the confusion.

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.