A snapshot of property tax changes in Budget 2018.
In order to stimulate acquisitions in the property market, a capital gains tax exemption was introduced in Finance Act 2012 in respect of gains on land and buildings acquired under an unconditional contract between 7 December 2011 and 31 December 2014. The portion of any gain exempted was linked to the period of ownership, with a minimum period of ownership of seven years required (with tapered relief available where the asset is held for more than seven years).
In his Budget speech, the minister announced a reduction in the required holding period from seven years to four years. The aim of the change is to reduce any impact the required holding period may have had on the supply of development land, with the intention of increasing supply in the market.
The amendment aims to enable owners to sell assets which qualify for relief between the fourth and seventh anniversary of the acquisition date, while still availing of relief from capital gains tax on any gains arising. It is still unclear whether the change will equally apply to land and buildings located in other EEA States (which are eligible for the current relief). It is expected that this will be clarified in the Finance Bill.
The rate of stamp duty on the transfer of non-residential property will increase from 2% to 6% with effect from midnight on Budget Day. The change applies to instruments executed on or after 11 October 2017. The minister made no reference to transitional measures applying in respect of transactions where a binding contract has already been signed, but the conveyance has not yet occurred. This has been raised with the Department of Finance and it is expected that transitional measures will be included in the Finance Bill.
This is a significant change which will likely reduce the number of commercial property transactions in the course of the next year. It seems that the minister’s estimated additional yield of €375 million from this measure is highly ambitious, given that c. €9 billion of transactions would be needed to generate such a yield.
In the context of the increase in rate noted above, and in recognition of the housing supply challenges that currently exist in the market, the minister announced that a stamp duty refund scheme will be introduced for 8 TaxingTimes Budget 2018 land purchased for the development of housing. There will be a number of conditions which will need to be satisfied in order to qualify for a refund, including a requirement that development of the land will need to commence within 30 months of the land purchase. Details of the conditions which will need to be satisfied to qualify for the refund scheme will be outlined in more detail in the Finance Bill.
The Urban Regeneration and Housing Act 2015 introduced legislation providing for the establishment of a vacant site register in relation to sites which were situated in an area in need of housing, were suitable for the provision of housing, and were vacant or idle. Additionally, in relation to such vacant sites, a vacant site levy of 3% was to apply from 2018 onwards, with a lower levy of between 0% - 1.5% applying where any site loan was greater than 50% of the market value of the vacant site.
In an attempt to prevent perceived hoarding of development land, the minister announced proposed changes to the vacant site levy which will increase the 3% rate applicable in the first year to 7% in the second and subsequent years. For example, if a vacant site is held in 2018 and 2019, under the proposed changes a 3% levy would apply for 2018, with a 7% levy applying for 2019.
In a move aimed to address the current shortage of available properties in the private rented sector the minister announced a measure to encourage owners of vacant residential property to bring such property to the market. The proposed new measure will allow a deduction for “pre-letting” expenses of a revenue nature (for example routine repairs and maintenance costs) incurred on a property which has been vacant for a period of 12 months or more (such expenses would not currently be considered deductible). The relief will be subject to clawback if the property is withdrawn from the rental market within four years, and will be subject to a cap of €5,000 per property. The relief will be available for qualifying expenditure incurred up to the end of 2021.
In order to increase the availability of debt funding to developers, the minister announced the establishment of a new dedicated fund, Home Building Finance Ireland (HBFI), which will be allocated up to €750 million of ISIF funds to provide commercial lending on market terms to viable residential development projects. In his Budget speech, the minister noted that the additional funding allocated to HBFI has the potential to fund up to 6,000 homes in the coming years.
Much has been written in the last year in relation to the merits, or otherwise, of the Help to Buy scheme which was introduced in last year’s Budget for properties acquired/built by first time buyers between 19 July 2016 and 31 December 2019.
On Budget Day the minister published an independent report by Indecon on the Help to Buy scheme, which can be found on the Department of Finance’s Budget 2018 website. One of the key conclusions of the report notes that, given we are in the early days for the scheme, it is too soon to assess its impact on pricing and supply.
The report notes that desirable features of the scheme include its €20,000 cap, restriction to houses purchased below €500,000 and limited lifetime (to 31 December 2019), whilst also suggesting that the scheme has somewhat helped with affordability and is still relevant.
We believe that the Help to Buy Scheme is playing a significant role in making marginal projects viable and that it will, in time, be seen to have helped to boost housing supply considerably. Our more detailed analysis of why we support the Help to Buy scheme is contained in our recent TaxWatch publication available on our website www.kpmgpublications.ie
Among the many documents published with the Budget was a 136 page report from the Working Group on the Tax and Fiscal treatment of Rental Accommodation Providers.
This report, which can be accessed on the Department of Finance’s Budget 2018 website, sets out a number of potential short, medium and long term measures that could be implemented in order to improve the tax treatment of many landlords. It is a comprehensive document based on an open and extensive public consultation. Interestingly, the report notes that majority of Irish landlords are individuals owning one or two properties, and that as of May 2017, the top 20 landlords (large professional landlords including companies, REITs, and investment funds and individuals) accounted for just 2.83% of residential tenancies.
As the majority of its recommendations are, for now, just recommendations, we refer interested parties to the document itself as referenced above for further information.