Personal Finance: Cashback drawback

CASHBACKS - mortgages where they hand you back a pile of money after you complete the deal - should be treated with suspicion.

They are designed to lure the borrower into a variable rate loan with the promise of immediate cash.

New home owners can always welcome extra cash to pay for curtains, carpets or a washing machine.

But the arithmetic will often show that the certainty and protection from higher rates through a fixed-rate loan - or a longer-lasting discount - give a better deal.

And if that wasn't bad enough, the Inland Revenue may just take an interest.

So far only one lender, the Cheltenham & Gloucester Building Society, has asked for a ruling on the tax status of their cashbacks, which run up to pounds 6,000. The answer was that they are liable for capital gains tax, which kicks in on gains of more than pounds 5,800 in any one year.

But that does not mean that all other cashbacks will be treated the same. It depends on where the money comes from.

If the money came from the lenders' advertising budget, the Revenue says, this would incur a double blow. It would be counted as income and clobbered for income tax; and if the mortgage was tied to an endowment loan, it would count as an inducement. This would invalidate the endowment's tax status, so the payout would be subject to tax.

Many upright citizens may have received this cash believing that it was just their own money being handed back, and failed to inform the Revenue of the transaction. And who could blame them?

Instead of waiting passively for lenders to submit their schemes for a tax ruling, the Revenue really ought to take the initiative and rule these payments out of the tax net. But it would be even better if they fell out of favour and were replaced by longer- lasting deals.

If home owners need the cashback to complete a house purchase, then perhaps they can't quite afford it.

SAVERS with cash in the Cheltenham & Gloucester Building Society will have to sit tight for a bit longer.

The society now expects to come up with a new plan to distribute the pounds 1.8bn on offer from Lloyds Bank in mid-August and will not appeal against the court ruling that outlawed payments to savers of less than two years.

The challenge now is to devise a scheme that will persuade enough members to vote the deal through, even though around 20 per cent are too new to benefit at the outset. The society may be able to devise a way of giving extra-generous rates to non- member accounts and savers, but the real trick will be to open the way for the members of less than two years to join in the fun.

Under the discarded scheme, existing long-stay members stood to gain in relation to the lower balance of their accounts on either 31 March 1994 or the date of final denouement. So they could run down the accounts from 31 March without losing out, as long as they replenished them by the final date.

The only advice at this stage must be to keep all existing accounts open and try to have enough cash around to restore them to their Spring level.

NEVER invest in anything that mentions the words 'market value adjustment'. It means that the promises you thought you had can be whipped away at any time.

Typically you will find these dreaded words buried in with-profits funds. These are the funds that are supposed to offer the certainty of annual bonuses to smooth out bumpy stock market rides.

But if the estimates of where the market is heading have been too optimistic, the guarantees count for nothing and the MVA comes along to chop away your gains. You can bet the 'adjustment' has never been upwards.

FINANCIAL companies are apparently trying to set up their services so that you need to be within the fold to gain access to the best deals.

Nationwide last week gave the bank wars story a new twist by setting an alluring overdraft rate of 8.74 per cent (down from 18.1 per cent) - but only for those who have a Nationwide mortgage. Others pay 11.5 per cent.

With Direct Line, you only get one of the most competitively priced mortgages at 6.75 per cent if you already have Direct Line motor or home cover.

You may be lucky and get a good deal on all parts of the deal. But the danger of linking products is that it inhibits shopping around on each element of the package.