On balance and in line with our predictions, the budget as it relates to Property, contains little in terms of tax measures. The stamp duty increase is being used to fund the cost of some of the Income tax and USC measures and it remains to be seen what impact this will have on the market. A lot of property has been bought over the past 4 years and many are now in asset management mode. A lower rate of duty in our view would have been more measured and would assist in keeping ourselves competitive in the Real Estate international markets.
Whilst the housing crisis is really bad and will get worse, there are no radical measures in the budget to significantly move the dial to retain investors in the market or drive supply. In fact, the vacant site levy is to be increased to 7%, which in turn will have to be passed on to purchasers of residential units. Most developers and funds who buy lands with a view to developing same have to go through a long planning process and fund it from their own equity and even then, when shovel ready, a bank will not lend on an entire site but is more likely to do so in phases. In the meantime it looks like the levy will have to be paid. This measure needs further thought.
There was no movement in VAT, no change in the interest relief for rented residential property, no deduction for LPT, all of which were flagged for discussion by many commentators.
There was a change in the 7 year capital gains tax exemption for investors and allows an exit after 4 years, which will help straddle the exit for some investors who want to sell earlier. It’s interesting that some commentators generally felt this measure was being used to hoard land for sale but the facts are that a developer or fund buying land to develop and sell would not be entitled to claim it.
We await the Finance Bill for more detail and any potential new measures.
Stamp Duty on commercial property
The rate of stamp duty on commercial property has been increased from 2% to 6%.
Any person who purchases commercial property from midnight tonight will be affected.
It has been well flagged that the rate was set to increase in the budget and it is now confirmed that the rate of 6% applies for instruments executed from midnight tonight. A stamp duty refund may be available in respect of land for development of houses under a refund scheme. This is subject to developers commencing development within 30 months of land purchase.
Perhaps a rate increase in Stamp Duty on commercial property is warranted considering the rates in the past of up to 9% and in the light of tax cuts in other areas. The rate is for commercial property only and not residential. In many cases commercial property needs to be bought and sold in order for residential housing to be built on it.
It had been mooted that the rate would be increased to 4% which would have been fairer and would keep us competitive in our offering to foreign investors. The impact that this will have on transactions remains to be seen.
Capital Gains Tax Relief on land and buildings
For those who bought investment property before the 31 December 2014 cut off point the budget proposes to reduce the hold period for the exemption from 7 years to 4 years so that owners of qualifying assets can sell those assets between 4th and 7th anniversaries of their acquisition and still obtain full CGT relief.
What action should be taken? Consider whether the exemption applies and whether you wish to avail of the exemption by selling property once the 4 year hold period has expired.
The relief was introduced to stimulate activity in the property market. It applies to disposals of land or buildings acquired in Ireland or in any EEA State between 7 December 2011 and 14 December 2014. There is full relief if the land or buildings is held for 7 years. The relief tapers if the land is held for more than 7 years e.g. if it is held for 8 years before disposal 7/8ths of the gain is exempt.
This proposal to reduce the hold period from 7 years to 4 years to free up land for housing, is to be welcomed. It could facilitate an earlier disposal strategy for some.
Vacant Site Levy
The Vacant Site Levy can apply to sites which have the potential to provide housing to meet local housing need and demand. It is calculated on the market value of a site determined by the local authority.
The standard levy rate of 3% which will apply from 1 January 2019 for property which has been held in 2018, will be increased to 7% for each subsequent year.
A site must be vacant for a minimum period of 12 months before it can be subject to the vacant site levy. Each planning authority is required to establish and maintain a vacant site register. The levy is applied to sites exceeding .5 hectares in area.
If you have received a notification from the local authority or own a site which exceeds .5 hectares for more than 12 months, and is suitable for residential development, this levy could affect you, and you need advice.
There are real and significant issues with this proposal. Where developers are not in a position to develop all their land, planning is slow and finance is not available yet.
For example many developers are phasing developments due for genuine strategic and commercial reasons and may be liable to pay the levy on such lands. The 7% levy increase could result in raising the cost of house building because they would have to charge on the cost.
Help to buy scheme and mortgage interest relief
The scheme which provides assistance to those buying new homes has been continued for another year.
The relief is given through a rebate of income tax computed at 5% of the purchase price of the home up to a maximum of €400,000, pro rata for values below this level, and it won’t be available to a person buying a new home costing more than €600,000.
This relief is early in the process and we need to wait to determine whether it is achieving its objective. It seems to be helping first time buyers to buy property.
The mortgage interest relief was due to expire by 31 December 2017. It is proposed to continue until 2020, whereby the relief is 75% for 2018, 50% for 2019 and 25% for 2020. This is another measure which hopefully will encourage more houses to be built.
Landlords - Interest Relief on borrowed money to buy rental residential property
The restriction on interest relief on money used to buy residential property will continue on a phase basis so that 85% of interest payable which is otherwise allowed, is available as a deduction against rental income received from 1 January 2018, and 90% for 2019, 95% for 2020 and 100% et seq. for 2021.
Pre letting expenses relief is proposed to encourage owners of vacant residential property to bring the property into the rental market. The relief applies to property vacant for 12 months or more. There is a cap of €5,000 per property.
It is business as usual and no change here. However in our view the reinstatement of full interest relief on borrowed money to buy rental property should be immediately restored rather than on the drip.
The question of a deduction against rent for property tax is a discussion point given it is akin to rates on a property and would perhaps be one of a number of changes that would help landlords stay in the rental market.
The pre letting expenses relief is to be welcomed.