Stamp duty is becoming increasingly important as we have seen a significant rate rise for certain transactions. This article sets out the key changes that have been introduced in Finance Act 2017 and some background and detail on the rebate mechanism that is available where commercial property is developed into residential property.

Rate Change

Finance Act 2017 increased the rate of stamp duty on transfers of non-residential property from 2 percent to 6 percent for instruments executed on or after 11 October 2017. Whilst there were transitional measures, for conveyances executed from 1 January 2018, this higher rate will apply. This higher rate will extend to transfers of assets such as goodwill and debtors. Subject to transitional provisions, the new 6 percent stamp duty rate also applies to lease premiums paid on leases of non-residential property executed on or after 11 October 2017.

This rate rise was budgeted to yield €372 million, which would be indicative of transfers of over €9.3 billion. This would represent a sizeable increase in the level of activity within the property market as compared to recent years.

Shares deriving value from immovable property situated in the State

One of the significant changes introduced by Finance Act 2017 was the increase to the rate of stamp duty applicable to the transfer of non-residential property as outlined above. A late Seanad Committee Stage amendment to the Finance Act introduced an anti-avoidance section 31C Stamp Duties Consolidation Act (“SDCA”) 1999, which extends this stamp duty rate increase to the sale or transfer of shares in property holding companies.

Broadly, a higher rate of 6 percent will apply on the transfers of:

• shares (in Irish and non-Irish incorporated companies);
• shares/units in Irish real estate funds (“IREF”);
• interests in foreign collective investments schemes; and
• interests in partnerships

that derive their value, or the greater part of their value, directly or indirectly, from Irish non-residential land and buildings.

This 6 percent rate will only apply where:

1. the transfer results in a change in the person or persons having direct or indirect control over the immovable property; and
2. it would be reasonable to consider that the immovable property concerned:
   • was acquired by the company, IREF or partnership with the sole or main object of realising a gain from its disposal;
   • was or is being developed by the company, IREF or partnership with the sole or main object of realising a gain from its disposal when developed; or
   • was held as trading stock by the company, IREF or partnership.

The rules will apply to conveyances or transfers of shares, units or partnership interests but also to contracts for the sale of any such shares, units or interests which might otherwise not be stampable.

The measure is designed to apply where the value derived is wholly or mainly from non-residential property, and is thus not designed to capture trading companies but care should be taken when ascertaining where the value within a company is derived from. When determining if the value or the greater part of the value of the shares/units/interests is derived from immovable property, it is necessary to look at the gross value of the immovable property as a percentage of the gross value of all of the assets of the entity holding the property. The rules prohibit the artificial reduction of this percentage through the introduction of cash or others assets.

There are transitional measures, which will limit the stamp duty rate to the existing rate (1 percent or possibly exempt) where a binding contract was entered into before 6 December 2017 and was completed before 1 March 2018.

In essence, this anti-avoidance legislation was introduced to prevent artificial transactions being effected whereby commercial property is placed within a corporate to avail of the 1 percent stamp duty rate. The provisions also extend to vehicles such as partnership interests and Irish property funds. Accordingly, the sale of commercial property on an outright basis or through the aforementioned structure will now attract a rate of 6 percent.

Where the land held by the entity/fund/partnership is developed into residential property, the stamp duty rebate scheme (discussed in further detail below) may apply.

Rebate scheme

Finance Act 2017 introduced provisions (in particular section 83D SDCA 1999) for a rebate scheme for stamp duty paid on land acquired to develop residential property, allowing for a potential refund of up to 4 percent of the stamp duty initially paid (i.e. up to 2/3 of the 6 percent upfront stamp duty cost).

The rebate scheme is limited to the proportion of land used for residential development. This scheme has application where construction operations for residential property commence prior to 1 January 2022 and the construction operations must commence within 30 months of the date the land was conveyed to the purchaser. “Construction operations” refers to the construction of buildings or structures including the preparatory operations of site clearance, drainage, earth-moving, excavation, laying of foundations and provision of roadways and other access works. Any delays/time taken to conclude any planning appeal may be aggregated to this 30 month time limit.

The rebate scheme extends to stocks, marketable securities, units or interests in relation to which section 31C SDCA 1999 applies such that they shall be deemed to be land for the purposes of section 83D SDCA 1999 where, following the conveyance or transfer on sale, the immovable property satisfied the conditions for a repayment.

There is a four year time limit with regard to claiming a refund under this scheme, with supporting documentation being required to substantiate the entitlement to a reclaim. The following documents are required to make a claim:

• A statutory declaration stating that building work commenced within the 30 month period immediately following the date of execution of the instrument
• Where a refund is claimed in respect of part of the land (for example, for a phase of a development or a one-off house with curtilage exceeding an acre), the statutory declaration must also state the proportion of the area of the land in respect of which the refund is claimed. Penalties may apply in the event of a false or incorrect statutory declaration
• A certified copy of the deed that transferred the land
• Where there is more than one accountable person, a claim requires the written consent of all of the accountable persons to one of them making the claim

The repayment cannot be claimed in advance of the commencement of construction operations. The repayments may be sought on a phased basis where the residential development is being carried out on a phased basis.

These repayments must be claimed via Revenue’s e-Stamping system and the repayment will not carry interest. Revenue is currently developing an online system to facilitate the making of claims. It is expected that the system will go live in July 2018

The refund will be clawed back where the residential development is not completed within two years of the building control authority acknowledging receipt of the commencement notice or the land in respect of which the repayment was claimed not being at least 75% occupied by dwelling units and the gross floor area not being at least 75% of the total surface area of the land.

There are two alternative tests for determining completion depending on whether a multi-unit development or a one-off house is involved. In the case of a multi-unit development, a certificate of compliance on completion is required to be submitted to, and registered by, a local authority. The completion date is the date the certificate is registered by the local authority. This is the only test applicable to a multi-unit development.

In the case of a one-off house, as it is permissible to opt out of local authority certification, an alternative test can be used. The alternative test for completion is the Electrical Completion Certificate that is provided following connection to the electricity network.

Under section 83D(10) SDCA 1999, a repayment of stamp duty may not be made after the expiry of four years following the date of acknowledgement by a building control authority of receipt of the commencement notice. It is worth noting that Revenue may make enquiries or raise assessments in relation to underpayments of stamp duty for a period of 4 years from the date the instrument was stamped by Revenue. This 4 year restriction does not apply where the underpayment arises from fraud or neglect. If Revenue believe the requirements to claim a repayment have not been satisfied, they will notify the claimant of their decision and reasons for the decision. The claimant will have the right to appeal in accordance with normal appeal procedures.

Conclusion

In light of the increased rate of stamp duty, coupled with the significant changes to stamp duty legislation as introduced by Finance Act 2017, there is increased focus on this tax head and it forms an important consideration in deals and transactions. There are potential savings where commercial land is developed into residential property and taxpayers should be cognisant of the requirements and deadlines associated with availing of such refunds under the new provisions. Finally, the anti-avoidance provisions should be borne in mind when advising on transactions and considered in the context of each particular deal.

Sarah Meredith is a Tax Director with Grant Thornton

Email: Sarah.Meredith@ie.gt.com

Vanessa Egan is a Tax Manager with Grant Thornton

Email: Vanessa.Egan@ie.gt.com