Land, and the ownership thereof, is firmly embedded in our national DNA. It provokes much discussion and debate, with fortunes made and, as we currently see, lost through speculation on soil, bricks and mortar. As most of us make at least one land or property acquisition, the issues covered in this article affect us personally, whatever about in our working life.

How Did We Get Here? A Brief Overview of Recent Fiscal Policy

A cursory glance at measures in Finance Acts over, say, the past two decades or so point to our national obsession with land. As an area of economic activity, it has been tweaked regularly by successive Governments, and continues to be. Consider these:

• Residential property tax came and went but something similar seems set to emerge if the recommendations from recently commissioned reports are anything to go by, more on which later in this article. In the meantime, there is the €200 NPPR levy, the €90 PRTB registration fee and the current €100 household charge (an “interim measure”) to be getting on with.
• The rate of CGT on development land, be it residential or non-residential, was 40% in the late 1990s. A policy decision was reached to reduce this to 20% to encourage those hoarding land banks to release it. The rate remained at 20% until October 2008 and has since climbed to 30% (with a brief stop at 22%, then 25%, en route).
• As part of the same logic to free up land banks, profits or gains between December 1999 and 31 December 2008 from dealing in or developing residential development land were taxed at 20%. From 2009 on, such profits or gains are taxed under normal income tax rules, as they were before the change in December 1999, with loss ring-fencing rules also now in place.
• Since October 2009, we have an 80% rate of tax on profits or gains from a disposal of land that has benefited from a rise in value due to rezoning, a change introduced as part of the NAMA legislation. It seems the policy of freeing up land banks went too far and selling rezoned land can now attract a penal rate. As reported recently, no transaction has yet triggered the 80% rate. Hopefully, calls to replace it with a more realistic rate are heeded, so that it disappears like the 60% rate proposed in 1999 which was repealed in 2001 before it came into effect.
• Many changes in stamp duty rates on residential and non-residential land and property were made over the period under discussion. More on recent changes below.
• VAT on property and construction has taxed several minds since VAT legislation was first introduced in 1972. For radical change, one needs only go back to 2008. Prior to that (and indeed since), almost every Finance Act has a VAT on property piece, which has added to the complexity. We now have three sets of VAT on property rules needing consideration for any transaction – the old, the new and the transitional.
• The housing market was tinkered with often, amidst many income tax changes for investment properties, with interest relief frequently targeted. Currently, the level of allowable interest on Case III and V residential lettings is restricted; commercial lettings are not affected.
• A brief flick through the Taxes Consolidation Act 1997 index hints at the plethora of tax-based property incentives over the last twenty years. The aim was typically to encourage investment and economic development in certain areas, be they geographic (e.g. Leitrim) or sector-based (e.g. private hospitals; hotels), and fiscal policy was an instrument to achieve this. In some cases, a lot of social and economic good was done; in others, it clearly wasn't. Regardless of any good done, “high earner” relief capping has been with us for five years and, as we'll shortly see, more property-based relief restrictions are approaching fast.

This brief gallop through recent fiscal history indicates how much attention the property sector has received through tax legislation in recent years to meet varying Government policy objectives. And it continues

What Just Happened? Finance Act 2012 (“FA 12”)

Stamp duty on non-residential property was reduced from 6% to 2%, which is a flat rate applied to total consideration, replacing the progressive rates of up to 6% on transactions over €80,000. 50% consanguinity relief on transfers to blood relations continues until 2014. In virtually all cases, stamp duty cannot now exceed 2%.

A large furore ensued over the announced “phased” abolition of legacy property reliefs in 2011 as the measures, in effect, meant the immediate cancellation of many reliefs. The outgoing administration never signed the commencement order. In mid-2011, an open consultation process was completed and a report commissioned, entitled “Economic Impact Assessment of Potential Changes to Legacy Property Reliefs”. Published earlier this year, it clearly feeds into the FA 12 measures. We now have a much more targeted approach, which is consistent with Minister Noonan's comments in the Dail debates last year on the late Brian Lenihan's proposals. The key features are:

• The proposed ring-fencing of S.23/S.50 reliefs is gone; unused relief can be carried forward and claimed after the tax life expires.
• The announced 2011 phased abolition of reliefs for investors in accelerated capital allowance schemes is achieved this year. A guillotine comes down after 2014 where the tax life ends in 2015 or later, or where there are unused reliefs carried forward (other than those affected by the “high earner” capping rules) at 31 December 2014. Any unused allowances at that date are “lost”. There is an “out” for an owner/occupier carrying on a trade in the building.
• A 5% surcharge, collected as additional USC, applies from 1 January 2012 to investors with over €100,000 annual income and using property tax shelters to reduce their income tax liability. Their effective tax/PRSI/USC rate could be 60%.
• Another significant change in FA 12 corrects a situation where the clawback of tax reliefs on the property sale could mean an individual triggers the “high earner” restriction. Previously, the clawback was the total relief claimed (even if not used), taxed as rental income in the disposal year. Now, unused relief carried forward as rental losses into the disposal year can reduce the clawback, and consequently the notional rent figure.
• A new CGT relief applies for residential or commercial properties, situated in an EEA country, purchased between 7 December 2011 and 31 December 2013. If held for seven years or more before being sold, no CGT arises on any gain during the seven years. If owned for longer, the gain is time-apportioned and the relief calculated like partial PPR relief. The relief only applies if at least 75% of the market value is paid for a property. As with other CGT reliefs/exemptions, if a gain is not taxable, then a loss is not allowable. Careful planning may be needed.

What's Next?

An annual property tax seems certain and has been well-flagged in a series of reports and announcements, with a sharper focus thereon noticeable since the Commission on Taxation report was published in September 2009. Most recently, the ESRI published a report in April entitled “Property Tax in Ireland: Key Choices” setting out their views on the operation of the tax and an Inter-Departmental Expert Group was to report to Minister Hogan by 30 April. We still have no visibility on what level the tax is likely to be at but the ESRI report suggests a rate of €2.50 to €3 per €1,000 of house value, which they estimate will generate around €500 million per annum.

Minister Noonan, speaking in the 2011 Finance Bill Dail debates “the introduction of a tax break as a lever should be available to the makers of public policy.” That has been the case here for many years and hopefully will be again. However, with the phasing out of the property-based “breaks” and the pressures on our fiscal sovereignty, through IMF troika and EU oversight, how much flexibility do he/his successors have in using such “levers” in the short to medium term? Managing existing property tax breaks up to tax life expiry dates is clearly needed but there may be no real prospect of any new investor driven capital allowance based schemes any time soon. That said, it is hoped the FA 12 measures designed to get the stagnant property market going again will bear fruit, with lower stamp duty rates and a CGT relief acting as a stimulus.

What of Revenue's audit plans in relation to property? In addition to ongoing “routine” activity in areas like property or construction industry VAT and RCT checks, one area currently attracting focus is use of development losses. There is a current Revenue “project” and, in some cases, officials refer to S.1013 TCA 1997 where such losses are used to shelter other income. As with any such matter, it is a question of fact as to whether the losses are allowable.

Gary O'Mahony is Head of Tax at Kieran Ryan & Co.

Email: gomahony@kieranryan.ie
Website: http://www.kieranryan.ie/