Budget 2018 real estate

Perspectives

Real Estate

Budget 2020

Overview

As expected in the context of Brexit, on balance, the budget as it relates to property, contains little in terms of tax measures.

The housing crisis rumbles on and although indicators are that house prices are levelling off, this is probably more to do with fears over Brexit and mortgage limitations, imposed by the Central Bank, rather than supply keeping up with demand. The consensus is that we need to build at least 10,000 more homes per year to cope with demand.

For more Budget commentary visit our dedicated Budget 2020 webpage.

Help to Buy Scheme

One successful measure is the Government “help to buy scheme”, an effective tax credit of up to €20,000, i.e. €500,000 @ 4%, which can be claimed towards a deposit, is set to continue for another two years until the end of 2021. While this is welcome we had hoped for a longer term commitment to help new house buyers.

There were rumours that the cap on qualifying properties would be lowered in an effort to ensure that those who can already afford a home won’t be subsidised. This has not happened this time.

Stamp Duty Increase

The Minister announced an increase in the rate of Stamp Duty on commercial property from 6% to 7.5% from midnight. He said that this sector should be able to sustain this increase without significant impact. Normal transitional arrangements will apply for transactions in process.

This will of course, have an effect on house prices because, although the rate of 2% remains on residential purchase, the land on which those dwellings are built is considered commercial land for stamp duty purposes. There is a tax refund mechanism available to refund the difference on completion of the dwellings which would reduce the stamp duty to 2% and this will continue. However, this scheme has proved complex and difficult to avail of in practice.

There was concern that the rate of stamp duty of 2% on residential properties with value above a certain threshold would also be increased. However, this hasn’t happened. Perhaps the fear that this would deter further investment by large scale funds and institutional buyers has influenced the decision to leave the stamp duty rate on residential as is.

Otherwise for individual landlords there is nothing of significance to encourage them to remain in the rental sector. High personal tax rates don’t make it easy to remain.

We need to encourage such investors back to the market and a lower rate of tax should be considered to do this. The reality is that the fund investors and the Real Estate Investment Trusts (REITs) have an effective 20% rate so why not match that for those in the population who can afford to help rebuild and rehouse our fellow citizens. It would be a fair measure.

Anti Avoidance for Real Estate Funds and REITs

The Minister announced that there would be anti-avoidance measures relating to property investment funds effective from midnight.

The measures include new provisions for Irish real estate funds, to ensure that the tax take from such funds is increased. The measures are targeted at what are termed aggressive activities, including the use of excessive interest charges to avoid the payment of tax in respect of profits from Irish property.

The anti-avoidance measures are being introduced to address these issues, including the introduction of limitations on interest expenses based on debt to property cost and on an income to interest ratio, whereby the disallowed amount would be charged to income tax in the IREF.

In addition a number of amendments are being made to the REIT framework to ensure that the appropriate level of tax is being collected from the regime, particularly in the area of capital gains. The distribution of proceeds from the disposal of a rental property will be subject to dividend withholding tax upon distribution. An existing provision whereby a deemed disposal and re-basing of property values occurs should a company cease to be a REIT is being limited to apply only where the REIT has been in operation for a minimum of 15 years. These changes will be effective from midnight tonight.

Hospitality Sector

The VAT rate increase from 9% to 13.5% on the hospitality sector which was imposed last year, seems to be having an effect of making this sector struggle, particularly in rural areas. It looks like no further tax support will be forthcoming. However we note that the Minister has allocated €40m towards support for the Tourism sector as part of the Brexit strategy.

We await the Finance Bill for more detail and any potential new measures.

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