Rent Pooling

Introduction

The purpose of this article is to set out Revenue’s position on the pooling of rent from multiple properties. The issue has arisen in relation to some of the property-based tax incentive schemes such as the scheme for nursing home residential units. However, this article is also relevant to the treatment of rental income outside of the incentive schemes.

Revenue understands ‘rent pooling’ to mean the amalgamation of rents and expenses for several properties to arrive at a single net profit or loss figure and the distribution of the net rental income among the several owners of the properties according to each person’s share of the overall expenditure on the properties. This type of computation and allocation will not necessarily provide the ‘right’ answer and is specifically disallowed by the Tax Acts which require that separate rental computations be done for each individual property.

The article looks at the issue of rent pooling in the context of different arrangements and shows (see scenarios below) how a certain type of arrangement involving a management company may allow a form of rent pooling that does not contravene the provisions of the Tax Acts.

Tax incentive schemes

The reason why rent pooling is an issue is that it provides a convenient mechanism to facilitate the collection and distribution of rent among investors in proportion to each investor’s share of the overall expenditure on a particular development. The reason why rent pooling is not generally acceptable is that it may not take account of ‘uneconomic rents’ (discussed below); the uneven distribution of rent and expenses among a group of properties; and the possibility that some of the properties in a development may not have met the qualifying conditions for a particular incentive scheme. Examples of scheme conditions include:

• A qualifying lease must be entered into in the case of a ‘section 23’ property.
• The first tenant must be an appropriately registered student in the case of the Student Accommodation scheme.
• A nursing home residential unit must be let to a registered nursing home or to an appropriately medically certified person selected by a registered nursing home.

Student Accommodation Scheme

In its ‘Explanatory Note on the operation of the provisions of the Taxes Consolidation Act, 1997 in relation to the Student Accommodation Scheme’ (available at www.revenue.ie), Revenue accepted a limited form of rent pooling with effect from 1 January 2004. This limited form of rent pooling provided that management and letting fees and other deductible expenses that were appropriate to all properties could be pooled, while expenses that were specific to an individual property could not be pooled. That document stated that Revenue was prepared to allow rent pooling in the particular circumstances and context of the Student Accommodation scheme only and only in respect of rents received from students during the academic year. Rents and expenses for periods outside of the academic year were to be allocated in accordance with the strict provisions of the Tax Acts.

Relevant TCA provisions

Section 75(4): Where the general trend over time in relation to a particular let property, is for (non interest) expenses to exceed the rent receivable from the letting, Sections 75, 97 and 384 are disapplied in relation to the letting. This means that expenses that are generally allowable, including interest on borrowed money for the purchase or improvement, are not deductible and losses cannot be set against other taxable rental income or carried forward to subsequent years. Effectively, expenses and losses attributable to such ‘uneconomic rents’ are ignored for tax purposes.

Section 96: The ‘person chargeable’ is the person who is entitled to the profits or gains from the rents.

Section 97(1)(b) and (c): The surpluses and deficiencies must be calculated in respect of each individual property before each individual surplus or deficiency is amalgamated and netted off to give an overall net surplus or deficiency for all of the properties. Without such individual computations, it would not be possible to identify any ‘uneconomic rents’ as required by Section 75(4).

Use of management companies

A feature of some of the tax incentive schemes, particularly the Student Accommodation scheme and the scheme for residential units associated with registered nursing homes, is the use of management, or other intermediary, companies to deal directly with the ultimate tenants. The rental computation(s) depends, inter alia, on the letting and other relationships between the owner of the property and the management company and between the management company and the ultimate tenants.

Key questions are who is the ‘chargeable person’ in respect of the rental income and who pays the rents. Depending on the particular relationships it may be possible for both the owner and the management company to be chargeable persons. The owner could be a chargeable person in respect of his or her letting arrangement with the management company. The management company, in turn, could be a chargeable person in respect of its letting arrangements with the tenants. Being treated as a chargeable person entails the submission of annual returns of rental income to Revenue.

Possible rental arrangements

This section explores the issue of rent pooling in the context of several different rental arrangements. The various scenarios outlined below are presented in a simplified manner and are intended solely for illustrative purposes and are not intended to be exhaustive. Who the ‘chargeable person’ is, i.e. who is entitled to the profits or gains from the rents, and the manner in which the rental profits/losses are computed, is ultimately to be determined by reference to the particular facts and circumstances of each individual case.

Examples

• An owner of a ‘section 23’ property leases that property directly to tenants. The rental computation for the property depends on the rental income and allowable expenses attributable to that property. The same situation applies where the owner leases several such properties. As long as there are no ‘uneconomic rents’ and all of the properties qualify for ‘section 23’ relief, the same net result is obtained whether the surpluses and deficiencies are amalgamated or are first computed separately for each individual property.
• All of the apartments in a ‘section 23’ apartment block are owned jointly by several investors. Each of the investors has incurred a different amount of expenditure and owns a share in each of the apartments in proportion to his or her share of the overall expenditure. At the end of the chargeable period in which the apartments were purchased, the investors have entered into qualifying leases directly with tenants for all except one of the apartments. Until such time as that apartment is let, it does not qualify for ‘section 23’ relief and any attributable pre-letting expenses cannot be included in the rental computation. If there are no ‘uneconomic rents’, the net rental profit/loss is distributed among the investors in proportion to their share in the overall development.
• All of the apartments in a ‘section 23’ apartment block cost the same amount and are purchased individually by several investors. At the end of the chargeable period in which the apartments were purchased, all of the investors except one have entered into qualifying leases for their apartments directly with tenants. The rental computation for each apartment depends on the rental income and allowable expenses attributable to that apartment. There are no allowable expenses attributable to the unlet apartment and the owner has no entitlement to any of the rental income from the other apartments.
• The individual owners of several houses enter into leases directly with tenants and use a management company to provide letting and management services for which they pay a fee. The management company lets all of the houses, collects the rents on behalf of the individual owners, deducts its fee and pays the net rent to the owners according to whatever rent was received for a particular owner’s house. Each individual owner is a chargeable person in relation to the rental income from his/her house and each individual owner’s share of the management company’s fee is an allowable expense in his/her rental computation. The management company’s fee income is Case 1 trading income.
• The individual owners of qualifying residential units in a nursing home development let all the units to a management company acting for the registered nursing home. Each individual owner is entitled to a share of the profits or gains from the rent received under the lease with the management company in proportion to his/her expenditure and is a chargeable person in relation to that rent. Apart from the capital allowances arising from the purchase of the units, the only allowable expense incurred by the owners is the interest on the money borrowed to finance the purchase of the units.
• The management company, in turn, lets the units to elderly and infirm tenants. It decides on the amount of rent to pay to each individual owner and bases this on the expenditure incurred by the individual owners. It will pay the agreed rent to each owner, regardless of what happens to his/her particular unit. This means that the owners are not concerned with whether their particular unit is in receipt of ‘uneconomic rents’ or bears a disproportionate share of the management expenses. This is the concern of the management company, because it is the chargeable person in respect of the rent received under its leases with the tenants. In preparing its rental income computation, the management company must establish the surpluses and deficiencies for each individual unit and take account of any ‘uneconomic rents’ and the expenses attributable to a particular unit.