Revenue Tax Briefing

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Revenue Tax Briefing Issue 71

Stamp Duty Audit: Owner/Occupier Relief

The purpose of this article is to provide definitive clarification of the position with regard to the issue of tax1, interest and penalties in the context of Stamp Duty audit and the clawback or otherwise of the owner/occupier property reliefs. Examples are provided to assist understanding of the stated points. (Readers should note that V.A.T. implications are ignored for the purpose of the examples provided).

Clawback

In the case of owner-occupier and first time buyer reliefs (granted under Sections 91, 91A, 92, 92A and 92B), the issue of 'clawback' of either relief may arise. It will occur in circumstances where the property has been occupied as a principal place of residence and subsequently rental income or payment in the nature of rent2, other than rent qualifying under the stamp duty rent a room3 provisions, arises within five years from the date of execution of the instrument that gives effect to the purchase of the property. (Effectively, this means five years from the date on which the legal conveyance is signed). The Finance Act 2008 has reduced this period to two years, for deeds executed on or after 5 December 2007. For deeds executed before 5 December 2007, to the extent that the property is rented out on or after 5 December 2007, it will not involve a clawback of the relief where this occurs in the third, fourth or fifth year of ownership. For further detail refer to the stamp duty section of the Revenue website www.revenue.ie.

The clawback is a penalty equal to the difference between the amount of tax that should have been charged, had the (relieving) section not applied, and the amount of duty actually charged, together with statutory interest due (on the amount of the 'clawback') calculated in accordance with the provisions of Section 159D.

Interest is chargeable at a rate of 0.0273% per day or part of a day with effect from 1 April 2005 from the date the payment (i.e. the rent or payment in the nature of rent) is first received to the date the clawback is remitted. From 1 September 2002 to 31 March 2005, interest was chargeable at a rate of 0.0322% per day or part of a day; and from 1 April 1998 to 1 September 2002, interest was chargeable at a rate of 1% per month or part of a month.

When a 'clawback' event arises, the person in receipt of the rent must inform Revenue within six months and they are facilitated in declaring the liability by means of completion of a 'clawback' form. This form is contained in Appendix 6 of the Notes for Guidance relating to the Stamp Duties Consolidation Act 1999 and is also available on www.revenue.ie.

Even if notification is received within six months of the date of receipt of the rent, interest is imposed to the clawed-back amount. Revenue does not operate any concessionary treatment whereby interest is not imposed in this context.

No further penalty sanction arises other than that set out above. The imposition of a Section 14 penalty is not appropriate in cases of clawback. Section 14 provides for a 'Penalty on stamping instruments after execution' in the case of the late payment of stamp duty. As it is not necessary to stamp any instrument in cases of clawback - Revenue are taking back the relief or exemption already granted in the form of a penalty - the section has no relevance and is not applicable.

Publication, in accordance with the provisions of Section 1086 T.C.A. 1997, cannot arise in a 'clawback' case, as there is no tax element to the settlement.

Example 1

Mr. A, a qualifying first-time purchaser, purchases a property in Cork on 3 April 2007 for €400,000 and is exempted from stamp duty.

  1. Mr. A. occupies the property as his only or principal place of residence until 1 February 2008 when, for professional reasons, he is transferred to a new location.
    He rents the property with effect from 21 February 2008, clawback of the relief granted of €30,000 (i.e. €400,000 @ 7.5%) arises. Mr. A. advised Revenue of the clawback liability on 15 September 2008. Interest of €1,703 (i.e. €30,000 @ 0.0273% X 208 days) also arises, making the total amount due of €31,703.
  2. Mr. A. occupies the property as his only or principal place of residence until 1 May 2008 when, for professional reasons, he is transferred to a new location.
    He sells the property to an unrelated third party on 1 June 2008 (not having rented the property in the period 1 May 2008 to 1 June 2008, or at any previous time). The outright sale does not give rise to any issue - clawback does not arise.
  3. Mr. A. occupies the property as his only or principal place of residence until 1 May 2008 when, for professional reasons, he is transferred to a new location. He also rents a room to a work colleague to assist with his mortgage repayments. The work colleague also quits the house on 1 May 2008.
    There is no question of a clawback when the colleague occupies the property once Mr. A. is also occupying the property as his only or principal place of residence; this applies regardless of the amount of rent being paid.
    The question of clawback or otherwise only arises when Mr. A decides what to do with regard to the property after 1 May 2008, arising from that decision the position will be as set out at i and ii above.

Investor Settlements

In the context of an audit settlement, by which is meant a liability arising in cases other than those of pure clawback, as detailed above, and typically referring to an 'investor'4, taxpayers and practitioners alike should be aware that Revenue will pursue tax, interest and penalties - as is standard with any Revenue audit performed in accordance with the terms of the Code of Practice for Revenue Auditors, effective September 2002.

In such cases, the full amount of the duty arising, together with statutory interest (calculated in accordance with the provisions of Section 159D S.D.C.A. 1999) falls due.

In addition, penalties are routinely applied in accordance with the provisions of Section 8 (3)S.D.C.A. 1999. This section is concerned with fraudulent or negligent5 execution of an instrument and imposes a penalty of €1265 and the amount of the duty payable. This penalty can be mitigated in accordance with the Code of Practice for Revenue Auditors.

In audit cases of this type, current practice is not to pursue any other penalties under any other section. For example, regarding Section 14 penalties (as stated, the section provides for penalties, in addition to interest, for the late payment of stamp duty6), in the context of audit settlements, two such separate penalties (i.e. Sections 8 and 14) for the same offence of this nature are not pursued. (The imposition of Section 14 penalties is more appropriate at the processing stage).

In general, in the context of a 'yielding' audit, it is to be expected that the penalty to be applied will normally fall within the provisions of Section 8.

Publication (provisions Section 1086 T.C.A. 1997 again refer) can of course arise in 'investor settlements'. This will occur once the appropriate circumstances, as set out in the Code of Practice for Revenue Auditors effective September 2002, apply.

Example 2

Mr. B, stating he is a qualifying first time purchaser, purchases a property in Dublin on 1 May 2007 for €600,000 and is exempted from stamp duty.

Subsequently, Mr. B is the subject of a stamp duty audit and it transpires that he actually lives with his parents in their family home and had bought the property as an investment. He never intended to occupy, and he never occupied, the property as his only or principal place of residence. The property is rented from the date of purchase.

In this instance, the question of clawback of the exemption granted is not appropriate, as the purchaser was never actually entitled to the exemption in the first instance.

Mr. B is liable for the correct amount of stamp duty originally payable of €45,000 (i.e. €600,000 @ 7.5%). The liability is established on 15 September 2008. Interest of €6,179 (i.e. €45,000 @ 0.0273% X 503 days) and Section 8 penalty for the fraudulent or negligent execution of the instrument of €46,265 (i.e. €1265 plus the amount of duty underpaid €45,000) arise. There was full co-operation and a prompted qualifying disclosure was made. In the circumstances, the penalty can be mitigated to between 10, 20 and 50% of the amount calculated above, depending on the category of default involved.

Summary

In cases of clawback:

  • The amount due consists of a penalty figure, which equates to the stamp duty that would have been charged had the section not applied and interest on that amount at the rate of 0.0273% per day from the date the rent or payment in the nature of rent is first received to the date the penalty is remitted.
  • No further penalty sanction arises other than that set out above. (The imposition of a Section 14 penalty is not appropriate in cases of clawback).
  • Even if notification is received within six months of the date of receipt of the rent, interest is imposed to the clawed-back amount. Revenue does not operate any concessionary treatment whereby interest is not imposed.
  • Publication is not an issue (No amount of 'tax/duty' arises in the amount falling due).

In other cases, for example those of an investor:

  • The full amount of stamp duty falls due together with interest on that amount at the rate of 0.0273% per day and a Section 8 penalty of €1265 plus the amount of duty. The penalty may be mitigated in accordance with the provisions of the Code of Practice for Revenue Auditors effective September 2002.
  • Publication arises in the appropriate circumstances (Code of Practice refers).

Footnote

1'tax' means any tax, duty, levy or charge under the care and management of the Revenue Commissioners.

2It is important to note that a clawback does not arise where the property is sold in a bona fide sale to an unconnected party or the owner moves to another dwelling, unless of course the property is first let in the circumstances stated above.

3Provided that the purchaser continues to occupy the house as his or her PPR for the relevant period, a clawback of stamp duty will not arise even where the rent received is in excess of the annual threshold which applies for income tax purposes.

4This would include for example, a person who never occupied or intended to occupy, as a principal place of residence, the property which was the subject of the original claim to stamp duty relief or exemption and subsequently rented that property

5Finance (No. 2) Act 2008, Schedule 5 applies to contraventions occurring after the passing of the Act, the categories of default liable to penalties have changed.

6Section 81 of the Finance Act (No. 2) 2008 provides for the remission of the fixed and further penalties (but not interest) payable on late stamping of instruments executed before 24 December 2008 where such instruments are delivered to the Revenue Commissioners by 17 February 2009 and the duty chargeable, together with interest on that duty, is also paid by that date. Revenue e-Brief No. 05/09 refers.