Revenue Note for Guidance

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Revenue Note for Guidance

106A Transfer of rent

Summary

This section counters a tax avoidance scheme to reduce exposure to the higher rate of income tax on rental income of certain individuals. Under the scheme a person who is entitled to a flow of rental income transfers the right to receive the income to a company in return for the receipt of a capital sum from the company. The scheme was designed to achieve a situation whereby the income flow to the company from the right to receive the rent would be taxable at the 25% rate – or, if received by a financial institution, at the 12% corporation tax rate as trading income.

This section addresses both sides of the avoidance transaction. Firstly, it provides that the capital sum is to be taxed as income in the hands of the individual when he or she become entitled to receive it (or when it is actually received, if that is earlier). Secondly, the section clarifies that the rental income flow to the company will be chargeable as Case V rental income, and therefore will be taxed at the 25% corporation tax rate.

Details

Definitions

(1)(a) “relevant transaction” is defined as any scheme, arrangement or understanding under which—

  • a person becomes entitled to receive a capital sum, and
  • the consideration given for the entitlement to receive the sum consists wholly or mainly of the direct or indirect transfer to another person of a right to receive rent which, otherwise, could reasonably have been expected to accrue to the person who received the capital sum.

The scheme involves two persons, the person to whom the rent is transferred and the person who receives the capital sum. These can be individuals or companies. The consideration given for the receipt of the capital sum is to consist wholly or mainly of the transfer of the rent. This means that the right to receive rent must amount to more than 50% of the total consideration given. The right to receive the rent can be transferred directly or indirectly. Finally, the rent concerned is rent which, in the absence of the scheme, could reasonably have been expected to accrue to the person who received the capital sum or to a connected person.

“rent” is defined as any sum which is chargeable under Case V of Schedule D or would be so chargeable if it arose from a source in the State. Case V is the charge on rental income from property in the State. Where property is outside of the State, the rental income from it would be charged under Case III as income from a foreign possession. The definition ensures that all rental income is covered by the section.

(1)(b) The meaning of a “relevant transaction” is extended so that the grant of a lease comes within the scope of the section in certain circumstances. This arises where a lease is granted by a person if in connection with the lease—

  • the person is entitled to a capital sum,
  • rent is payable to another person, and
  • the consideration given for the capital sum is wholly or mainly the grant to the other person (or a connected person) of a right to receive rent under the lease.

This ensures that the main provision cannot be avoided by the creation of a lease.

Tax treatment of recipient of the capital sum

(2)(a) The capital sum received under the scheme is to be treated as income chargeable under Case IV of Schedule D. Consequently, it will be subject to income tax at the person’s marginal rate. It is to be charged in the earlier of—

  • the year of assessment in which the person becomes entitled to the sum, or
  • the year of assessment in which they actually receive the sum.

This treatment only applies to a person other than a company.

(2)(b) This rule does not apply if the transaction is a securitisation transaction, i.e. the asset given (being the right to receive rent) is a “qualifying asset” acquired by a “qualifying company” within the meaning of section 110 of the Taxes Consolidation Act. This disapplication of the rule does not apply, however, if the person receiving the capital sum is an individual.

Treatment of the person who receives the rent

(3) The rental flow to the person who acquires the right to the rent is to be taxed under Case V of Schedule. Where such income arises to a company, it will be subject to corporation tax at the 25% rate. This rule is disapplied where the rent is transferred as part of a securitisation, i.e. the right to receive the rent is a “qualifying asset” acquired by a “qualifying company” within the meaning of section 110 of the Taxes Consolidation Act, 1997. This disapplication does not apply, however, if the right to receive the rent was acquired from an individual.

Relevant Date: Finance Act 2019