With increasing taxes and rising unemployment, more and more individuals who invested in prop-erty in recent years are finding it increasingly difficult to repay their mortgages. As increasing numbers enter into arrears, banks now find themselves appointing receivers over personal properties with increasing regularity.

A fixed-charge receivership is the process whereby a secured lender appoints a receiver to take custodial responsibility of the property over which they have a charge; the principal purpose being that the receiver may collect the rent of a mortgaged property (if any) and sell the property.

An advantage of appointing a receiver is that the bank does not become “Mortgagee in Possession”. The bank (the mortgagee) does not, for example, assume the responsibilities of the landlord. It is not liable to account for default in management to the same extent as if it became Mortgagee in Possession. Therefore, a receiver typically insulates the bank from the legal obligations that may arise from being a Mortgagee in Possession.

A fixed-charge receiver is deemed to act as an agent for the borrower; accordingly the actions of the receiver are the actions of the borrower for tax purposes. However, the primary duty of a receiver remains to realise the assets for the bank. The borrower will therefore remain the beneficial owner of the property until the property is sold by the receiver.

Monies received by a Receiver

The receiver will normally be in receipt of monies during their appointment namely rental income or proceeds from a sale of the property and these monies must be applied to pay the following:

• taxes, rates and outgoings of the property;
• annual sums and interest on all principal money having priority to the mortgage;
• commissions, including insurance premiums and other necessary expenses;
• interest in respect of the mortgage;
• in discharge of the mortgage as directed by the bank,
• any remaining monies are to be paid to the next mortgagee or owner.

Tax Treatment of Rental Income Collected by the Receiver

A receiver will collect the rental income from the tenants of the property and where a rental profit arises, an income tax liability must be paid to Revenue. The issue therefore is whether the Receiver has the obligation to pay such tax to Revenue or does the responsibility lie with the bank?

Section 52 TCA 1997 provides that the person in receipt of income can be assessable to tax under Schedule D. In the case where a receiver is appointed over a property, the receiver is receiving the rent effectively as agent for the borrower. They also discharge the running costs of the property and the interest charges of the bank; but the income does not “belong” to the receiver in effect. Therefore the receiver is not responsible for paying over the tax arising on the rental income to Revenue.

Section 96(3) TCA 1997 appears to make the bank the assessable person for paying over the tax to Revenue in respect of the rents where they have appointed a receiver. Section 96(3) TCA 1997 provides as follows:

• “Where the estate or interest of any lessor of any premises is the subject of a mortgage and either the mortgagee is in possession or the rents and profits are being received by a receiver appointed by or on the application of the mortgagee, that estate or interest shall be deemed for the purposes of this Chapter to be vested in the mortgagee, and references to a lessor shall be construed accordingly; but the amount of the liability to tax of any such mortgagee shall be computed as if the mortgagor was still in possession or, as the case may be, no receiver had been appointed and as if it were the amount of the liability of the mortgagor that was being computed.”

This section states that the rental income is taxed as if it was the banks but computed in accordance with individual's liability.

This may cause practical difficulties for the bank as they are likely to be without the following relevant information if the borrower is not co-operating with them or the individual's tax advisor cannot provide the details:

1. Details of any losses forward or current year losses that may be available to be used against the rents;
2. Details of other income received by the borrower;
3. Details of their spouses income (if any) if they are taxed on a joint assessment basis;
4. Details of any reliefs or losses that their spouses may have that the investors could claim.

The receiver however must comply with the provisions of S890 TCA 1997 and file a return (Form 8-2) as they are a person in receipt of income belonging to others. The return must:

• include details of the name and address of the person entitled to the income;
• detail a statement of profits;
• be filed by 31 October in the year following the relevant year of assessment. Therefore details of any rental income and expenses for 2010 should be included on the Form 8-2 by the Receiver and filed by 31 October 2011.

CGT treatment

As stated earlier, the main aim of a receiver is to sell the property over which they are appointed. In the current climate, it is likely to be more common that a loss will arise on the sale. However, should a gain arise, section 571 TCA 1997 provides that any chargeable gains accruing on disposals by the receiver are to be assessed on the receiver.

Therefore when a receiver sells the property and makes a gain, the tax arising must be paid over to the Revenue Commissioners out of the proceeds of the sale. The provisions of S571(7) TCA 1997 state that the CGT is assessable on the receiver as an income tax assessment under Case IV at the standard rate of tax on an amount that would equal the referable CGT. For example if the CGT due is €5,000 (€20,000 * 25%), an income tax assessment of €30,000 at 20% is to be made to recover it. The payment date for the receiver would appear to be in line with the income tax payment dates.

The CGT liability is calculated by reference to the circumstances of the borrower, and therefore losses and the amount of personal allowances that would normally be available to the borrower may be utilised by the receiver. However, as was the case with regard to the rental income, the ability to gather this information may prove difficult particularly if the client is not co-operating or their tax advisors are unable to provide the relevant information.

Where a loss arises on a disposal, the loss belongs to the borrower and cannot be used by the receiver unless they are selling another property owned by the same borrower and a gain has arisen.

Property Incentive Schemes

Budget 2011 announced sweeping changes to capital allowances schemes namely in the way of a phased abolition of tax based property incentives. The implementation of these changes has been delayed pending an impact assessment report (the outcome of which is not expected to be until 2012 at the earliest). There are certain implications for the borrowers (being the investors) where Receivers are appointed over their properties.

Balancing events – tax incentivised hotels and nursing homes

The appointment of a receiver over a property is not a balancing event for the purposes of capital allowances claimed on the property i.e. their appointment should not trigger a claw-back of allowances already claimed as the relevant interest (held by the investors) has not been disposed of.

When the receiver sells the property and this sale occurs within the tax life, this will trigger a balancing event resulting in either a balancing allowance or charge. A balancing allowance is treated as additional capital allowances, while a balancing charge is treated as additional rental income and is taxed accordingly.

Section 97 TCA 1997 treats a balancing charge as rental income. By virtue of section 96 TCA 1997 (discussed above) it would appear that where there is a balancing charge the accountable person for that tax will be the bank where they have appointed a receiver. The income tax liability will be computed in accordance with the individual's circumstances.

The availability of capital allowances for future purchasers will depend on the scheme involved and also whether the proposed changes will be implemented at the time of sale.

If the sale by the receiver occurs outside the tax life, a balancing event should not occur. Therefore there should be no tax implications for the bank other than CGT in the unlikely event of realising a gain.

Rental income and availability of capital allowances

In the event that the property is rented out, because the borrowers remain the beneficial owners of the property until it is sold, any capital allowances available can be used against the rental income to reduce the tax liability that will arise for the bank. It is important to be mindful that some borrowers may be affected by the specified reliefs restriction and these restrictions would need to be applied when the bank is calculating the tax due on such rental income received. This may cause serious practical difficulties for the bank given the likelihood that they will not be in receipt of such information.

Crona Brady is Assistant Tax Manager with Grant Thornton
Email: crona.brady@ie.gt.com
Tele: 01 680 5773