409A Income tax: restriction on use of capital allowances on certain industrial buildings and other premises

Summary

The purpose of the section is to restrict capital allowances available to individual passive investors on industrial and commercial buildings but excluding hotels, holiday camps, holiday cottages and other self-catering accommodation. Section 409B deals separately with hotels and holiday camps. Subject to transitional provisions, the restrictions generally apply to expenditure incurred after 3 December, 1997 on such buildings including those in tax designated areas. The restrictions do not, however, affect —

• investments made by an individual owner operator of a business or by an individual actively engaged in the operation and management of a business, or
• investments made by companies including financial institutions in any of the developments in question.

The measure is therefore essentially aimed at individuals who are lessors of industrial buildings and all types of commercial premises, including multi-storey car-parks, which attract capital allowances whether generally or under various tax incentive schemes such as the Urban Renewal, Living over the Shop, Rural Renewal, Park & Ride, Town Renewal and other schemes aimed at the development of certain medical, childcare and 3^rd level educational facilities.

Passive investors targeted by the section may still set off up to €31,750 excess capital allowances against non-rental income in any tax year after the allowances have first been set against rental income from all sources. If, after such set-off, there are still excess allowances then the balance can be carried forward and set against rental income arising in the following year/s.

Transitional provisions provide that certain pipeline projects are not affected.

Details

Definitions

(1) “active partner” in a trading partnership is defined as a partner who works for the greater part of his or her time in the day-to-day management or conduct of the trade;

“industrial development agency” means the Industrial Development Agency (Ireland);

“partnership trade” and “several trade” are already defined in Part 43;

“specified building” means industrial buildings within the meaning of section 268(1), (except for hotels, holiday camps and holiday cottages), certain other buildings used for childcare and 3^rd level educational purposes as well as all types of commercial premises attracting capital allowances under various tax incentive schemes.

Limit of €31,750

(2) The section dis-applies a provision in section 305(1)(b) which allows for the excess of capital allowances over, for example, rental income to be offset against a taxpayer’s other income. A substituted provision places a limit of €31,750 (£18,500 for the short tax year 2001) on the amount of such excess allowances which can be set sideways. Any balance can be carried forward against future rental income. The measure is subject to transitional provisions and targets capital allowances in respect of expenditure incurred by passive investors on or after 3 December, 1997. Thus, for instance, in the case of an individual who is a lessor of an industrial or commercial building, the effect is to restrict to a maximum of €31,750 the amount of excess capital allowances which can be set against income other than rental income for tax purposes in any one year.

Anti-avoidance

(3) & (4) The section anticipates that individuals affected by the €31,750 restriction limit might claim to be involved in a trading partnership. In this way they could use excess capital allowances to create or augment trading losses and thus circumvent the restricting measure. To guard against this, the section provides that unless an individual is an active partner, working for the greater part of his or her time in the day-to-day conduct of the trade, the amount of allowances which can be used to create or augment a trading loss is limited to €31,750 in a tax year. Also, where a partner who is not an active partner is involved in two or more partnership trades, he or she is deemed to be involved in a single partnership trade for the purposes of the section. This ensures that the €31,750 restriction limit applies to capital allowances in respect of expenditure incurred on specified buildings across all trades in which a partner is involved, instead of €31,750 for each partnership trade which would otherwise be the case.

Transitional measures

(5) This section includes some transitional arrangements where commitments were made prior to 3 December 1997. Section 409A does not apply to capital expenditure incurred by an individual on or after 3 December 1997 on a specified building where before that date:

• in the case of construction, the foundation of the building was laid in its entirety,
• in the case of refurbishment, work up to the value of 5 per cent of the total cost of the refurbishment was carried out, or
• the building was provided for the purposes of a project approved for grant assistance by an industrial development agency within a period of two years preceding 3 December 1997.

Additionally, the section does not apply to expenditure incurred by an individual on or after 3 December 1997 where an application for planning permission for the work represented by the expenditure had been received by a planning authority prior to 3 December 1997, or the individual can prove, to the satisfaction of the Revenue Commissioners, that a detailed plan had been prepared for such work and detailed discussions had taken place with a planning authority prior to 3 December 1997. In these instances the expenditure must be incurred by the person entitled to the capital allowances under an obligation entered into before 3 December 1997 or before 1 May 1998 pursuant to negotiations which were in progress before 3 December 1997

(6) Obligations will be treated as having been entered into before 3 December 1997 only if there was an existing and binding contract, in writing, under which the obligation arose. Negotiations pursuant to which the obligation was entered into shall not be regarded as having been in progress unless preliminary commitments or agreements, in writing, were entered into before that date.

Death of investor

(7) There is provision to allow transitional treatment for expenditure incurred by a new investor to a project where an original investor, who had already contracted to invest in an industrial or commercial building, dies. The new investor must give a written commitment to honour the obligations of the deceased investor in relation to the project and must actually incur the expenditure which the deceased individual would have incurred.

Application to professions

(8) The provisions of the section which are set in the context of a trade are specifically extended to cover professions as well.

Relevant Date: Finance Act 2019