April 2017

Introduction

CCAB-I agrees that landlords are an essential feature of a fully functioning residential property market. We also agree that the residential property market is in crisis in certain parts of the country, and in particular Dublin.

There is a shortage of supply of residential rental properties and increased demand has pushed up the rental prices making it extremely difficult for prospective ‘renters’ to find homes. Rising house prices may well be pushing accidental landlords out of the rental market, further constricting the supply of residential rental property. On the other side, the price of houses is also rising so ‘would-be’ purchasers are being pushed into the rental market, therefore further increasing demand in that market.

According to a recent report by MyHome.ie[7], house prices have surged to by 9 percent nationally and by over 10 percent in Dublin in the first 3 months of 2017. Reasons cited are looser lending practices, the new Help to Buy scheme along with a lack of supply to cope with demand.

The report also notes that the number of homes listed for sale on MyHome.ie has fallen by 10 percent on last year’s figures and now stands at 19,430. Most of these property listings are outside of Dublin with the capital experiencing an acute shortage in supply.

We agree that the rental housing market is also intrinsically linked with the owner-occupier housing market. In the short term, increases in supply to the rental market may be achieved at the cost of a reduction in supply to the owner-occupier market, and vice versa.

This submission puts forward suggestions for some alterations to the tax system to incentivise landlords to remain in or to enter the residential accommodation market. Currently in the Irish tax system, investors in REITs and other property funds have a more favourable tax treatment than individuals holding property. We are calling for this favourable tax treatment to be extended to such individuals to address some of the inequity. In this submission we have noted that any taxation proposals should not act as an alternative source of income for other control measures implemented by the Government.

This proposal addresses the following questions:

1. What is the single most significant issue which is causing existing landlords to consider exiting the rental market, or deterring potential investors from entering the residential property market? Is there any tax or fiscal measure that could address this issue, having regard to existing Budget constraints?

With the Census 2016 showing that Ireland’s population has increased by over 173,000 since 2011 with the largest inward migration of people to Dublin, and predictions of even larger population increases, the housing market will become even more restricted. There are potential opportunities for Ireland when the UK leaves the European Union which could necessitate Irish resident people relocating to avail of new jobs, or non-residents migrating here to access job opportunities. However, unless something changes in the housing market quickly, Ireland simply will not be able to house its people. A sustainable economy requires a functioning housing market.

According to a report[8] by the Society of Chartered Surveyors Ireland, 65 percent of private landlords are exiting the market due to indebtedness while 56 percent are leaving because of the restriction in interest deduction. We further note that there are many investors who are simply holding on to their properties despite financial difficulties. In a 2013 study[9], it was found that almost half of landlords of houses and apartments do not receive enough rent to cover the interest on their mortgages but have not opted to sell their properties. 44 percent said that they can afford to absorb the loss they will incur if they sell their properties but have opted not to do so. The behavioural aspect of the decision to sell or hold should be examined to further understand the market. Is it that individuals are afraid to make a loss and are holding out to see if property prices rise? The purpose of this paper is not to consider the psychology behind the sell decision but it is an interesting point to note.

CCAB-I does not support a return to state subsidies for capital repayments. It is our view that such reliefs contribute to a boom-bust cycle and historic evidence has taught us that this practice is not sustainable. We do recommend some changes to the capital gains tax and income tax systems and have detailed these below.

2. Property is, in many cases, a highly leveraged investment involving significant mortgage borrowings in addition to the capital invested by the landlord. Mortgage interest paid is allowable as a deduction in calculating taxable income from rental property. Similar treatment is not afforded to interest on borrowings used for other forms of income-generating investment – for example interest on monies borrowed to invest in shares is not allowable as a deduction against dividend income. Is it appropriate for the State to incentivise concentrated investment risk through the granting of interest relief for rental property investment?

We feel it is appropriate to allow a deduction against rental income of interest on monies borrowed to acquire a rental property. There has been much debate on the restriction introduced in 2009 where the deduction for mortgage interest paid was restricted to 75 percent from 100 percent. The Minister for Finance announced in Budget 2016 that a full interest deduction will be restored over a 5 year period by way of 5 percent annual increments with the first of these increments applying from 1 January 2017 with full interest deductibility expected by 2021.

It is important to note that landlords who rent commercial properties are entitled to full interest deductibility so this announcement goes some way to aligning the tax treatment of private and commercial landlords and introduces some fairness.

However, take an example of a landlord who pays €4,000 in interest during the year. The tax savings in 2017 compared to 2016 will be circa €100 in the year (assuming a 50 percent marginal rate of tax). This is unlikely to be enough to keep a landlord in the market. We would urge that full interest deductibility is introduced from 2018 in order to give an incentive for landlords to remain.

3. It has been noted that landlords may have a taxable rental profit in instances where their net rental income after making mortgage repayments and meeting other outgoings associated with the property is negative. Amortisation mortgage repayments are comprised of both an interest charge and a capital repayment element. Would it be appropriate for the State to subsidise the acquisition of a capital asset by a private individual by allowing relief in respect of the capital repayment element, and if so should some additional element of future income and/or gains from the property accrue to the State as a consequence?

Back in 2010, there was widespread public concern that the various schemes for property based tax reliefs and allowances were excessive and some form of restriction needed to be introduced. Finance Act 2011 and 2012 restricted the availability of reliefs and introduced a phased abolition with all property reliefs generally being abolished from 2014.

For investors who availed of property reliefs, the ability to use rental income, which for tax purposes had been sheltered by the relief, to repay mortgages was critical. This position was untenable. Ireland had created a situation where in the absence of any relief, these investors would not simply be able to pay their mortgages. When tax legislation changed, these people struggled. We cannot return to an era of such reliefs.

Taking an example of the cash flow situation of an investor claiming property reliefs:

	With property reliefs	Without property reliefs
Net rent	200,000	200,000
Tax shelter	200,000	0
Taxable profit	0	200,000
Tax (40%)	0	80,000
USC (11%)	0	22,000
PRSI (4%)	0	8,000
Net cash	200,000	90,000
Effective tax rate	0%	55%

By removing the property relief, cash flow has reduced by €110,000. While the investor has less money to pay his mortgage he is not dependent on the tax relief in order to do so and this is the key point.

The problem with property reliefs is that the market became flooded with small property investors who were average earners and purchased new apartments and houses in towns around Ireland. Many made investments as a pension on the basis of huge tax savings. Should the tax reliefs change, these investors are left in a situation where they cannot repay their mortgages and the properties are repossessed by the bank, leaving their tenants in perilous situations. We do not want to return to this practice.

Measures such as the guillotine of tax based property relief and the introduction of extra taxes on property investors such as the NPPR and the USC property relief surcharge introduced in 2011 and 2012, while may have been beneficial to the Exchequer in the long term, created high levels of distrust in the property market. Landlords are unlikely to be able to trust that any general new allowance or relief introduced will be in existence for the life of the property. Coupled with the high earners restriction, any benefit that may have been there has evaporated.

5. Would improved deductibility for rental expenses make a material difference to landlords when deciding to enter or remain in the rental market, and if so what expenses? Note: In this context it should be noted that the proposals relate to the treatment of the provision of rental accommodation as an active business, and therefore responses should have regard to the tax treatment of an equivalent expense in a trading context if proposing a new deduction

Would improved expense deductibility be passed on to tenants in the form of reduced rents, or are rental values driven by external market forces more so than by individual landlord profitability?

Section 97 TCA 1997 is prescriptive in what is allowed as a deduction against rental income. This is in stark contrast to a trade where any expense that is incurred wholly and exclusively for the purpose of the trade is allowed as a deduction against trading income. There is a clear disparity between these. We would recommend that expenses available under section 97 become less prescriptive and more in line with normal trading deductions.

There has been much commentary lately on the poor dwelling standards with reports of damp, mould and fire safety among other things. Lack of rental properties and increasing demand among those seeking to rent mean that tenants are willing to lease sub-standard properties. This means that landlords in some instances do very little in the way of repairs and maintenance. CCAB-I recommends increasing the wear and tear rates for fixture and fittings for furnishing the rental property from 12.5 percent to 25 percent per annum. This would allow a larger tax deduction and would encourage landlords to invest in the maintenance of rental properties and would encourage them to do so more frequently as the allowances are now available over 4 years rather than 8.

We would also recommend that local property tax (LPT) is allowed as a deduction against rental income. The recent decision by the High Court that the non-principal private residence charge (NPPR) is deductible against rental income adds to the argument that LPT should be allowed as a deduction.

6. Would a relief from capital gains tax on disposal of a long-term rental property in the future encourage landlords to remain in, or to enter, the residential letting market at present? Alternatively is it possible that it would lead to a greater exodus of landlords from the rental market?

As noted already, unfortunately the curtailment of property reliefs in 2010 – 2012 has led to distrust among individuals in terms of the availability of long term tax reliefs. CCAB-I feels that a relief from capital gains tax on the disposal of a long-term rental property would not have any effect on encouraging landlords to remain in or out of the residential letting market with another factor being the price volatility in the market unless the relief is guaranteed by the government and not subject to a withdrawal a few years down the line. We welcome some form of relief and we have made some suggestions below.

Section 604A TCA 1997 which introduced a capital gains tax relief on disposals of land or buildings which were purchased between 7 December 2011 and 31 December 2014 and held for 7 years prior to disposal was intended to stimulate activity in the property market. Disposals of these properties will begin from December 2018 and therefore there are no meaningful statistics available to analyse the success of this scheme.

A reduction in the rate of capital gains tax might encourage landlords to enter the rental market if they don’t see the tax on exit as a deterrent and look to make a worthwhile investment. The current rate of 33 percent is high by international standards and CCAB-I would like to see this reduced to 20 percent.

In 2005, the capital gains tax rate was 20 percent and the total yield from capital gains tax was €1,960 million10. In 2016, the capital gains tax rate was 33 percent and the total yield was €822 million. It can be argued that lower rates lead to increased yield and the figures provided below illustrate this point. We are mindful that declining asset values and a reduction in the number of asset transactions contributed in some manner to these figures over the past 11 years, but we feel that a reduction in capital gains tax to 20 percent would result in an increased number of transactions, getting the housing market going again and ultimately improve the capital gains tax yield.

Historic capital gains tax rates and yield[11]

Year	Yield € million	Rate
2005	1,960	20%
2006	3,100	20%
2007	3,105	20%
2008	1,430	22% (from 15 Oct 2008)
2009	542	25% (from 8 April 2009)
2010	347	25%
2011	416	30% (from 7 December 2011)
2012	355	33% (from 6 December 2012)
2013	369	33%
2014	561	33%
2015	669	33%
2016	822	33%

In the UK, capital gains tax rates range from 18 percent to 28 percent for individuals for residential property, much lower than Ireland’s 33 percent rate.

Furthermore the annual exemption amount in the UK is £11,100 per annum for an individual compared to €1,270 in Ireland. The annual exemption in Ireland in comparison is very low and we would call that this exemption be increased to €5,000 per annum.

Consideration might also be given to reintroducing a form of roll over relief for the disposal of property. Capital gains tax is essentially deferred and the acquisition of a new property takes on the period of ownership of the old asset.

A large number of professional landlords rent out properties and actively manage them themselves on a full-time basis; they essentially make a living from this activity and this is their business. We would ask that consideration be given to extending CAT business asset relief and CGT retirement relief to these businesses. It is unfair to discriminate professional landlords from such reliefs. If these reliefs were available, there is more likelihood that there would be more continuity in property ownership and these landlords are more likely to maintain the properties in a good standard when compared to accidental landlords.

7. Would a relief from capital gains tax on disposal of a rental property, conditional on the property being sold with a tenant in situ and/or a requirement for the property to continue in use as a rental property, be operable in practice? What protections could be used to ensure the continued tenancy rights of the sitting tenant, and in what manner could a clawback of relief be achieved if the new owner ceases to let out the property.

This relief would be of benefit to long-term renters as well as the landlords. The operation of this relief would need to be monitored closely to ensure the continued tenancy rights of the sitting tenant.

In an era where buyers are finding it increasingly difficult to get on the property market, long term renting may very well become the norm. Landlords are also looking for, reliable tenants. Therefore purchasing with a tenant in situ makes economic sense.

The seller will have the benefit of rental income right up until disposal and can therefore continue to repay the mortgage. Equally when the purchaser becomes the new owner, they will receive rental income from day one. This will allow the purchaser to maximise the investment with no loss of income or no expenditure on advertising and other costs to find a tenant.

According to research[12] carried out in the UK, in 2014 11 percent of all rental properties bought by investors came with a sitting tenant which was a 400 percent increase on 2008 figures. In London more than 25 percent of properties purchased by landlords had a tenant in situ. The report cited squeezed rental yields as a reason that landlords are seeking the guarantee of rental income immediately on purchase.

CCAB-I would suggest that legal protection needs to be put in place between the parties to the tenancy agreement. The rental deposit is also a cause of concern for tenants in situ and it should be made clear in writing to the tenants that the new landlord has arranged for this deposit to be transferred to him as part of the sale.

In terms of a capital gains tax relief where the property is sold on the condition that the tenants remain in situ, this would be welcome. A claw-back provision similar to that contained in capital acquisitions tax business asset relief could apply whereby if the purchaser does not honour the tenancy agreement, sells the property within the term or ceases to lease the property, any capital gains tax that would have been payable by the original seller now becomes payable on the purchaser. We would suggest that anti-avoidance provisions be introduced to ensure that transactions are not constructed in order to avoid capital gains tax.

Alternatively roll-over relief as described already could apply in this situation and would be appropriate for situations where tenants are in situ on a property disposal.

9. With regard to owners of vacant residential property, what are the primary reasons why such individuals do not choose to rent out the property, and are there tax measures which would encourage vacant residential property owners to enter the rental market?

According to Census 2016 figures, there are in the region of 198,000 vacant homes (excluding holiday homes) in Ireland. This is reduced from over 230,000 according to Census 2011 figures but is still extremely high.

Historically rental properties were purchased on the back of expected capital appreciation and rental incomes more than covered mortgage repayments. Credit was cheap and house prices were increasing, and investors were attracted to the ‘buy to let’ landscape. Many of these landlords sourced interest only mortgages for a specified term, tracker mortgages and 100 percent mortgages from the banks. Because the high rents were covering the repayments, and there were high deductions for interest, this situation was tenable for a certain period of time. Fast forward to the crash where interest rates increased and banks tightened their lending policies. Many investors were unable to meet their repayments.

Couple this with unfavourable tax treatment such as only being able to deduct 75 percent of the interest expense and not being able to offset household and local property tax charges as well as the NPPR charge along with having to register with the RTB, results in landlords choosing to leave the properties vacant. In some cases they become repossessed by the bank.

8. It is possible that ‘accidental’ landlords may choose to exit the rental market as property prices rise, reducing or eliminating negative equity on the rental property. Is there a specific tax measure or treatment which could incentivise such individuals to remain in the rental market as landlords?

Given the above analysis, it is possible that ‘accidental’ landlords will choose to exit the rental market when property prices increase so that they can make a return on their investment.

The market does need an incentive to keep certain landlords in the market and CCAB-I believe that a relief similar to Section 381 TCA 1997 relief for individuals who have rental losses in a particular tax year would create that incentive.

By way of background, section 381 TCA 1997 allows relief for trading losses as follows:

• against other income in the current year of assessment; or
• against trading income of the same trade in later years of assessment under section 382 TCA 1997; or
• as terminal loss relief, i.e. by carry back against trading income of the same trade in the three years immediately preceding the tax year in which the cessation arose under section 385 TCA 1997.

Applying this to a rental income situation, we propose the following:

• Current year rental losses, calculated as normal, are offset in the current year against the following:
  1. Earned income of the landlord
  2. Unearned income of the landlord
  3. Earned income of the spouse/civil partner
  4. Unearned income of the spouse/civil partner.
• The offset of losses between spouses or civil partners is only available where the couple is jointly assessed.
• The claim must be made within two years of the end of the year of assessment to which the claim relates.
• All of the loss must be claimed – it should not be possible to claim only a portion of the loss.
• There should be no requirement for the landlord to be trading in rental properties (relief under s381 would therefore be available).
• If the loss arises due to tax avoidance arrangements, relief should be denied.

We would also propose that USC charges are removed from rental income.

10. Is the threshold for the Rent-a-Room scheme set at the right level? Do increases in the threshold lead to increases in rent charged by those using the scheme? In view of the scheme’s objective of increasing supply of rented residential accommodation, should the threshold vary depending on the number of individuals who are renting in the home or the number of rooms let? Should additional reporting requirements apply to those who use the scheme?

The increase in the Rent-a-Room scheme from €12,000 to €14,000 per annum in Finance Bill 2016 was welcome. We don’t feel that increases in the threshold lead to increases in rent charged and feel the scheme works well as is for a particular market of students for example. We are mindful that only a minority of tenants would choose to live in someone else’s home.

Conclusion

To conclude, the residential property crisis needs to be addressed urgently. We cannot return to the era of boom to bust and the government needs to allocate resources and time to fixing the problem. We do not recommend a return to hugely generous tax reliefs in the form of property allowances but we do recommend that there is some relief for capital gains tax for individuals disposing of properties coupled with some additional reliefs to lower the income tax burden on landlords. We ask that the government give some sort of comfort to the taxpayer that any reliefs introduced will not be taken away in a short few years. This practice will only further impinge on the market.

We would urge the government to address this problem now; the market is already in crisis and without action will continue to deteriorate.

We hope that the points raised above go some way to alleviating this issue.

7. MyHome.ie Q1 2017 Property Report in association with Davy

8. Society of Chartered Surveyors Ireland 2017 Pre Budget Submission

9. Why do Investors not sell underwater buy to let property? Irish Evidence, Karl Deeter, Marie Hunt, Brian Lucey

10. Tax Strategy Group Capital and Savings Taxation Issues paper TSG 12/12 Department of Finance

11. Department of Finance End of year Exchequer Returns

12. As rents increase by 2.7% landlords increasingly look to purchase properties with sitting tenants, report by Countrywide Residential Lettings, 18 May 2015