Mortgage customers left in dark on tax implications of goodwill payment

I have had an Ulster Bank offset mortgage (with an inbuilt tracker rate of ECB+1.15 per cent) since 2007. As you are probably aware, Ulster Bank is ending the offset facility on this in 2024, and are making a payment in lieu of future offsetting to account holders.

My mortgage account there is a joint mortgage with a friend, and the property has been rented out since 2017, having been used as a principal residence prior to that.

Our letter from Ulster Bank has said that the amount they are paying us will be €18,700, and the current balance is €125,400, and is not in arrears (and never has been).

Are there any tax implications we might need to be aware of for this payment? We will likely use it to pay down the capital owed, either in a lump sum or by increasing the monthly payments for a time.

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I just want to make sure that there is nothing to be declared to Revenue in this instance. The offsetting benefit it is replacing isn’t subject to any taxation as far as we know, so I’m hoping that this money will be the same.

Mr DH

This group of Ulster Bank customers have had to be very patient over the past year or so. As everyone else is being hurried into closing accounts and branches are being shuttered, they have been told not to pay any heed to what’s going on and to carry on as normal.

It has clearly been an unsettling period for these borrowers.

Now the bank has finally got around to figuring out what to do with these loans. It has to be said its explanation is somewhat unconvincing.

The bank says it has always had the legal right to make the changes it is now enforcing, and I assume they are correct in this.

[ Ulster Bank move on ‘offset mortgages’ paves way for licence return in 2025 ]

Ulster Bank’s offset mortgages allow customers to cut their interest bill in two ways: by using savings in another Ulster Bank account to offset part of the loan; and by being able to pay spare cash into the mortgage account while having the flexibility to take it out again, known as “pay and redraw”.

The bank seems to say that they were looking to get another lender to take the offset book on as is even though no other bank in the Irish markets has an offset mortgage product. With banks, as always, looking to trim costs, it was never a runner that they were going to take on loans that were going to require setting up new structures, teams and overheads.

If Ulster Bank thought that was a likely outcome, they were kidding themselves. Eventually they have accepted they are going to have to get people off these mortgages in order to sell them, and the only way of doing that is compensating them for the lost opportunity if offsetting their home loan against other bank balances.

The bank says this will now cost it €58 million. And it could yet be more.

Given Ulster Bank’s somewhat truculent current relationship with the financial services and pensions ombudsman, it is not inconceivable that it will be challenged on the amounts it is offering here although whether any case would have merit would depend on its individual circumstances.

Certainly some people are advising customers to appeal the goodwill payment as a matter of course, requesting their data under a Subject Access Request under GDPR to see the numbers on which their payment was assessed and allowing them to check for any errors.

The bank says its goodwill payments plan will see offset mortgage customers get roughly double what they might have been expected to save over the remaining years of their loans on the basis of current practice and “taking into consideration market rates out to the end of the term of a mortgage”.

That latter element will be some trick as no one is prepared to say with any confidence what will happen interest rates 12 months from now, never mind 11 years, the average length of time the bank’s 4,500 offset mortgage customers have left to run on their loans. The average current balance is €106,000, the bank says.

[ Ulster Bank prepares for €477m ‘offset mortgages’ sale by changing loan terms ]

Between them they have €477 million in borrowings outstanding with the bank. It’s a not-inconsiderable number though they were clearly always a niche group within Ulster Bank’s €20 billion loan book.

Everyone will get a minimum of €5,250 even if they never used the offset facility on their loan. The bank says only one-third of its offset customers used the offset feature “to any great degree”, whatever that means in euro and cent.

The average payout under the goodwill plan will amount to €12,650, Ulster Bank says, with the payments due to be made in January. For the 10 per cent of these accounts that are in arrears, the goodwill payment will be offset against any arrears rather than paid out to the accountholder – at least if those arrears are greater than €1,000.

Depite the fact that accountholders with arrears below €1,000 get a cheque, they should not make the mistake of believing those arrears have been written off. They haven’t and people will still have an obligation to pay them off.

Why double your expected saving? That is to allow for unexpected circumstances later in the life of a loan, such as using an inheritance or redundancy sum to pay off a chunk of the loan, the bank says.

Which brings us to the thorny question of tax.

[ Ulster Bank down to final €200m of deposits ]

The bank is very clear: it does not give tax advice and it would be inappropriate of it to do so in this case. All it says on the subject is that it recommends you discuss the issue with a tax adviser, which is not particularly helpful for the bulk of offset mortgage customers who are likely PAYE workers and have not got such an adviser to hand as they would not have any general need for one.

I contacted the Revenue Commissioners which is normally helpful in guiding people on these sort of payments. However, they tell me they are as in the dark as you are.

“In order to determine the correct tax treatment applicable in any circumstance where a compensation payment is made to an individual, each settlement must be analysed on its own facts,” they told me, quite correctly. “Firstly, the nature of the compensation payment itself would need to be determined to establish if it is revenue or capital in nature. The general principles established by legislation, case law and Revenue guidance would then need to be applied to each case based on this analysis.”

But, critically, they say they cannot advise further as they simply do not know the structure of this scheme… because Ulster Bank hasn’t contacted them to get it sorted.

“Revenue is aware of media reports regarding the payments you reference in your email and will consider the tax implications of same, if any, once the full details of such payments are known,” Revenue told me. “If required, existing guidance will be updated in due course.”

Clearly, if Revenue does not know the terms and conditions of the scheme, they could hardly go any further.

The issue here, of course, is that if Revenue cannot say with any conviction what the tax position here is, I am not sure what the tax advisers you would be paying will be able to advise with certainly. Certainly, the €250 the bank is offering for financial advice – which they insist is advice on what to do with your mortgage once you lose the offset facility next May at the latest – will not stretch too far in this regard.

[ Q&A: What will happen to my mortgage since Ulster Bank left the Irish market? ]

For what it is worth, industry sources tell me that it is very unlikely that this money will be taxable unless your personal tax position is very much out of the ordinary. That’s the best I can offer, though I’m conscious it is some way short of an absolute assurance.

The other thing to note is that the bank says that, when it does sell your loan, it will be on the basis that the tracker rate remains in place and that the pay and redraw feature remains in place under a new owner. That latter bit may suggest that the loans will not be sold to one of the other banks.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice