In the past couple of years the Revenue Commissioners have conducted some field audits and made enquiries of solicitors and accountants aimed at uncovering cases where owner-occupier reliefs on investment properties have been improperly claimed. The Tax Briefing article suggests that in the future when conducting audits of taxpayers who have residential investment properties, Revenue auditors will be looking out for signs of noncompliance with the conditions of the relevant stamp duty reliefs.
Under current stamp duty legislation there are certain reliefs for first time buyers and owner-occupiers in respect of residential property. Since 31 March 2007 there has been a full relief for qualifying first time buyers of new or second hand residential properties. Owner-occupiers can avail of a full relief from stamp duty for dwellings which have a floor area of less than 125 square metres with owner-occupiers of dwellings with a floor area above 125 metres benefitting from a reduced stampable consideration, subject in each case to compliance with various conditions.
One of the principal conditions underpinning these reliefs is that the property is occupied as the principal residence of the buyer (or someone in right of the buyer) and that no person derives rent (or payment in the nature of rent) other than pursuant to the 'rent-a-room' scheme in respect of the property for certain periods of time (hereinafter referred to as 'clawback periods'.
The Finance Act 2008 reduced the clawback period from 5 years to 2 years for conveyances executed after 5 December 2007 and, for conveyances executed prior to 5 December 2007, the relief will not be lost where rent is received post 5 December 2007 where the property is in its third, fourth or fifth year of ownership.
Where rent is derived from such a property during a clawback period, the owner becomes liable to pay the stamp duty that would have been charged had the relief not applied. This amount becomes payable by means of a penalty and, in addition, interest is chargeable on the amount of the stamp duty owed from the date that rent is received until the date that the penalty is discharged in full.
The current rate of interest applying since 1 April 2005 is 0.0273% per day or part thereof and from 1 July 2009 the rate will be 0.0219% per day or part therof. From 1 April 1998 to 31 August 2002 the rate was 1% per month or part thereof and from 1 September 2002 to 31 March 2005 the rate was 0.0322% per day or part thereof. In its recent Tax Briefing article Revenue has indicated that it does not operate any concessionary treatment in respect of this interest liability.
A clawback of stamp duty relief is not triggered where the taxpayer sells the property to an unconnected third party within the clawback period. Revenue has previously clarified that a subsequent purchaser of such a property has no responsibility in relation to a clawback of stamp duty triggered by a previous owner and has no obligation to make any enquiries as to whether circumstances giving rise to a clawback have occurred. In the Tax Briefing article Revenue have additionally clarified some additional technical points concerning the operation of the penalty:
- if rent is derived from the property pursuant to the 'rent-a-room' scheme, a clawback will not arise where the rent received is in excess of the annual threshold which applies for income tax purposes;
- apart from the daily interest liability there is no additional late presentation penalty under Section 14 SDCA 1999.
The owner of a property is obliged to notify the Revenue Commissioners and the procedure for doing so is by means of completing a form entitled 'Advice of Receipt of Rent or Payment in the Nature of Rent' which is available on the Revenue Commissioner's website. The form must be returned to the Revenue Commissioners with a copy (not original) of the original deed of conveyance and payment of the penalty (including interest).
Perhaps more significantly in the Tax Briefing article Revenue drew a distinction between 'pure clawback' cases and 'investor settlements'. The former category would cover, for example, purchasers of properties who bought the property as their principal residence but who subsequently had to re-locate or emigrate and rented out the property during the clawback period. In these cases Revenue have indicated that the liability would be limited to the stamp duty and the daily interest and that publication under Section 1086 TCA 1997 as a tax defaulter would not apply to this category of cases. In the 'investor settlement' cases Revenue indicated that penalties under Section 8(3) SDCA 1999 are 'routinely applied'.
Section 8(3) SDCA 1999 imposes a liability to a fixed penalty of €1,265 plus an amount equivalent to the stamp duty which should have been paid in cases where fraud or negligence occur. Revenue would appear to consider cases where the taxpayer bought a property without ever intending to reside there as falling into the category where this additional level of penalty may be imposed. This Section 8(3) penalty can be mitigated by the Revenue Commissioners though Revenue have indicated that any mitigation will be carried out in accordance with the Code of Practice for Revenue Auditors. In addition, Revenue have signalled that publication in the list of tax defaulters may occur 'once the appropriate circumstances, as set outing the Code of Practice for Revenue Auditors … apply'.
Another point worth noting is that 'any person employed or concerned in or about the preparation' of a deed of conveyance can be exposed to Section 8(3) SDCA penalties. This, for example, could apply to solicitors who were aware or ought to have known that a client was improperly claiming first time buyers or owner occupier reliefs. In addition a purchaser (or his solicitor) who includes an incorrect certificate in a deed to avail of first time buyer or owner occupier ruling could also find themselves guilty of a Revenue offence.
In summary, practitioners can expect to see stamp duty clawbacks on residential investment properties being raised with increasing frequency by Revenue Auditors in the coming years.
This article was first published in Accountancy Ireland, June 2009, Vol. 41, No. 3.