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Finding a way for Tax, Landlords and Tenants to meet in the middle

Richard Harris as the Bull McCabe in the movie of John B Keane’s “The Field” says “My father looked at me with tears of pride in his eyes. He knew I'd take care of the land. And if you think I'm gonna face my mother in Heaven or in Hell without that field, you've got something else coming…”.  The Irish fascination with land is well known by us all including our lawmakers. 

The Department of Finance’s public consultation on the tax treatment of landlords ended on April 6th last.  It gave the opportunity to stand back and craft a future for taxing rent in such a way as to increase the supply of such accommodation or put another way for tax, landlords and tenants to meet in the middle.  Why?  Right now as we know demand is beating up supply with the losers being all concerned.   

High rents are a key driver of price inflation and of wage pressures, and this presents a direct threat to Ireland’s international competitiveness. This threat comes at the critical time when Ireland is trying to attract UK business in a post Article 50 world.  The business may come but these people need to go home at the end of their day’s work.  Many years ago my boss at the time came back into the office one night and saw me working very late and quipped that doing so saved on my rent payments; to be clear that’s not a suggestion!   Unappealing rents for tenants added to an unappealing tax environment for investors in the rental market gives the wrong answer and sends the wrong message.  Hence the Department’s very welcome and timely consultation request.  

We all know that making life easier, administratively and financially, for potential investors is an incentive to invest in any endeavour.  Add certainty of tax treatment and you’re on a winner.  Landlords are currently watching the value of their properties increase and with it comes the temptation to get out of the rental market.  Income tax on rents can exceed 50% whereas a capital gain on selling the property and perhaps repaying the related debt would be subject to tax at 33%. Depending on the property a landlord could be effectively looking at converting tomorrow’s rent receipts into cash today with a lower tax rate applying.  

Therefore I come back to making life easier for investors to enter as well as stay in the market.   Any change to property taxation should have an accompanying pledge for consistency and certainty of application.  Any future reliefs should be intended to “stay the course” and should not be significantly limited at a later date. Without this confidence investors may not enter the Irish residential rental market.

We saw very substantial and very swift changes to the complex securitisation and investment funds regimes in Finance Act 2016.  These changes were brought about because I understand that it was never intended that such rules should be used for certain property transactions but arguably the law did not reflect that intention. Therefore the time allotted for debate by the Dáil of any future changes to property taxation and Finance Bills generally should be extended.  This would allow sufficient time (paraphrasing Richard Burton in “Jeff Wayne’s War of the Worlds”) for such amendments to be “scrutinised as someone with a microscope studies creatures that swarm and multiply in a drop of water” in order to allow for certainty of application.  This would benefit all concerned including the overstretched legislation drafters.    

Further, what follows are some suggestions that our Head of Real Estate, Padraic Whelan, and I came up with when we were looking at the Department’s consultation. 

VAT on new homes is generally charged at a rate of 13.5%.  This is a significant upfront cost for both homebuyers and potential investors. However, under the Help to Buy scheme first time homebuyers are now eligible for a tax refund of up to €20,000 which helps reduce this VAT cost. Potential landlords seeking to acquire new properties for rental purposes are disadvantaged. Why not bring about an income tax credit for the VAT paid on the acquisition of a property or incurred on properties constructed with a view to rental. The credit could be spread over a two-year period with appropriate counter measures being imposed should the property not remain on the rental market for a required number of years.

An exemption from Capital Gains Tax was introduced back in 2012 for properties acquired between December 2011 and December 2014 where such properties were held for a period of seven years.  This sought to encourage activity in the property market.  Why not bring about an income tax exemption on rents for seven years on properties which are rented out for the first time.  Another suggestion to entice investors staying in the rental market would be to have a form of “roll over relief” whereby a capital gain on the disposal of an investment property could be deferred once the proceeds are invested in a similar property. 

Right there, and as I’ve previously written in this newspaper, some will say that this will benefit those who have funds available to make such investments, and that may be the case.  But Myron Scholes who shared the Nobel Prize for economics once wrote that success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities.  If that tax efficient investment increased the supply of rental property then is that not the very definition of success?   

The Irish tax code currently lacks any incentive to encourage landlords to engage in long term residential leases which would be of particular benefit to families living in rental accommodation. Why not bring about standard rate taxation on long-term residential leases given the standard rate of income tax is currently 20%. 

A tax deduction for expenditure on fixtures and fittings is currently available over an eight year period. This period should be accelerated to five years to help reduce the upfront cash burden experienced by landlords who are looking to upgrade or improve accommodation, particularly older or dilapidated accommodation.  Why not bring about an upfront deduction for the cost of fixtures and fittings on newly converted or restored premises which are rented for the first time. This would provide an additional incentive to boost supply without the déjà vu of some previous property reliefs.

Bruce Lee once said “to hell with circumstances, I create opportunities” and we already have the opportunity to attract business in a post Brexit circumstance. We’ve seen reports which are saying we need up to 50,000 additional houses.  Let’s make it easier for residential property investment to happen and to build (literally) on that opportunity. 

In short as Yeats said don’t wait until the iron is hot, make it hot by striking!   

Tom Maguire is a Tax Partner in Deloitte and his monthly columns on tax matters appear in the Sunday Independent. The above article was first published on 30 April 2017.

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