Finance Bill 2019
Help to Buy Scheme
The Help to Buy scheme, is an effective tax rebate of up to €20,000, which can be claimed towards a deposit, for first time buyers of newly built houses, is to be extended in its current format, until 31 December 2021.
Living City Initiative
The Living City Initiative is a tax relief that is available for refurbishments or conversion work on properties in designated areas of certain cities. The relief, which had been due to expire on 4 May 2020, has been extended until 31 December 2022.
Stamp Duty Increase on commercial property
The increase in the rate of stamp duty on commercial property from 6% to 7.5% is effective from midnight on Budget Day 8 October, subject to the following transitional measures included in the Finance Bill:
- The 6% rate will continue to apply to instruments executed before 1 January 2020, where a binding contract was entered into before 9 October 2019 and is accompanied by a statement to certify this.
The Finance Bill includes provisions to ensure that stamp duty of 2% applies where land is subsequently used for residential development in accordance with the stamp duty refund scheme.
Anti Avoidance for Real Estate Funds and REITS
Real Estate Funds
The measures included in the Finance Bill for Irish real estate funds, 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.
Anti-avoidance measures are being introduced to address these issues. These include the following:
1. Amendment to the IREF tax calculation to ensure that any gains which are reflected in the market value of the unit, but not in the accounts of the IREF, are subject to IREF tax;
2. The introduction of limitations on interest expenses based on debt to property cost and on an income to interest ratio. The disallowed amount would be charged to income tax in the IREF. A charge to income tax will apply where
a. the aggregate of the specified debt exceeds an amount equal to 50% of the cost of the IREF assets (based on a formula applied to property financing costs) and/or
b. the profit to financing cost ratio, i.e. interest cover, is less than 1.25:1;
3. Any other amount expensed in the accounts of the IREF must be incurred wholly and exclusively for the purpose of the IREF business and any excessive amounts are charged to tax in the hands of the IREF;
4. A charge to tax is introduced at the fund level in certain holder of excessive rights situations.
Changes 1 to 3 are effective from midnight on 8 October 2019
In addition a number of amendments are made to the REIT framework to ensure that the appropriate level of tax is being collected from the regime, as follows:
1. Expenses in calculating profits available for distribution must be wholly and exclusively for the purpose of the REIT business, and any excessive amounts are chargeable to tax in the REIT.
2. The distribution of proceeds from the disposal of a rental property will be subject to dividend withholding tax upon distribution.
3. Where a REIT disposes of a property and the proceeds are neither reinvested nor distributed to shareholders within 24 months, then such proceeds will be treated as property income of the REIT.
4. An existing provision whereby a deemed disposal and re-basing of property values occurs should a company cease to be a REIT or a group REIT, is being limited to apply only where the REIT or group REIT, has been in existence for a minimum of 15 years.
Changes 2 to 4 are effective from midnight on 8th October 2019.
The extension of the Help To Buy scheme, in its current format, is welcome but it would have been helpful if it was announced earlier so people can plan ahead rather than rush to meet the deadline.
This measure, together with retaining the 2% rate of stamp duty on residential property, are the most positive aspects for Real Estate.
However the stamp duty increase on commercial property to 7.5% across all commercial property irrespective of value could well impact the market and the expected yield is very optimistic, (it would take €9.4bn additional sales to raise €141m budgeted). We can’t see it happening.
In general the Budget and Finance Bill has proved a disappointment for investors in commercial property, putting Ireland very high up the chart in terms of transaction costs for commercial. Small investors will have to price chip to cover the additional cost or may reconsider.
The changes to both REIT’s and Real Estate Funds come at a time when stability and certainty of tax position is of the utmost importance and thus such tinkering with the provisions may discourage further investment in such vehicles.
For individual landlords there is nothing of significance in the Budget or Finance Bill to encourage them to remain in the rental sector. High personal tax rates remain coupled with a serious regulatory regime that needs external management and thus cost.
In terms of house building, the larger institutional Private Rental Schemes are the main source of activity in the market which is welcome and is a longer term investment providing annuity income to these pension funds and related institutional investors.