Ireland has a two-step budgetary process. The first is the announcement by the Minister for Finance of financial plans for the coming year, which he did yesterday. The second is the enactment of these measures in law which takes place early in the New Year. Sometimes, what is announced in the Budget is changed in the Finance Act and new measures can be introduced at that stage as well.
In his Budget speech, the Minister commented that both the residential and commercial property markets are showing signs of stabilisation in 2012. He confirmed that the reduced rates of stamp duty which he introduced in the 2012 Budget and the 7 year Capital Gains Tax holiday on property acquired before the end of 2013 will continue. While the major piece of property related news is the introduction of a residential property tax, the Minister was able to announce some new initiatives to encourage activity in the property market.
Local Property Tax
Local Property Tax (LPT), which in reality is a residential property tax, affects all residential property in the State. Landlords will be liable to pay the tax on rented property (unless the lease is for more than 20 years). As a transitional measure, only half the tax will be payable in 2013 and the full amount of tax will be due in 2014. LPT is an annual tax and will be a charge on the property.
LPT is a self assessment tax but the Revenue Commissioners will issue guidelines as to how to value one’s property. The valuation date is 1 May 2013 and that will give the valuation which will apply to the end of 2016. Therefore if there is an uplift in the property market generally or if one makes improvements to one’s property then the impact of that on the value of one’s home will not flow through to the LPT bill until 2017.
The tax rate is 0.18% up to €1 million and 0.25% thereafter. The Minister is introducing a series of bands, generally of €50,000 up to €1 million. For example, if the value of the property is €422,000, that places it in the €400,000 to €450,000 band and the amount of LPT is set as being €382 in 2013 and €765 thereafter.
The household charge will no longer apply from 1 January 2013 but any arrears will continue to be a charge on the property. Non-Principal Private Residence (NPPR) tax will continue during 2013 but will then be abolished. Likewise, NPPR is a charge on the property.
To encourage compliance, the Minister has proposed a draconian measure regarding failure to file LPT returns. The valuation date is 1 May 2013 and the deadline for submitting a paper return is 7 May 2013 with 28 May 2013 the final date for online filing. If one does not make a return and one is self employed, then one may be liable to a 10% surcharge on one’s income tax bill for the year. If LPT is unpaid, one will not get a tax clearance certificate which will have serious implications for those bidding for public sector contracts or carrying out activities, such as hotels and pubs, which require a tax clearance certificate for the necessary statutory licence.
There are a number of exemptions from the tax, for example newly constructed but unsold residential property and houses in designated unfinished estates. Unlike most of the other provisions of the budget, the Minister indicated that he will be publishing the implementing legislation, Local Property Tax Bill, next week so at that stage we should get a clearer idea about the detail of how the tax will operate and what the exemptions are.
LPT is to fund local authorities. From 1 January 2015 each local authority will have the ability to vary the rate of tax by plus or minus 15%.
The Minister projects that LPT will raise €250 million in 2013 and €500 million in 2014.
Real Estate Investment Trusts
The Real Estate Investment Trust (REIT) structure is a popular form of property investment in the US and was introduced in recent years to the UK. It is a tax transparent vehicle and the Minister has committed to introducing legislation to enable REITs to be established in Ireland. Despite apparent high demand for REITs in the UK, only major listed companies converted to REIT status. However, by structuring REITs so as to avail of the Ireland /US double tax treaty and given the new inter government agreement on FATCA, there may be merit in using Irish REITs for major international property investment.
One of the attractions of a REIT for investors is that they achieve an after tax return similar to that of a direct investment in property, while having the benefits of risk diversification as a result of the spread of properties owned by the REIT. The Minister has indicated that the REIT must have a diverse ownership.
A REIT is to be a listed company and will be exempt from corporation tax on qualifying profits from rental property. The REIT must distribute most of its profits to investors each year so that investors can be taxed. It will be interesting to see how the legislation will deal with taxing income of foreign investors.
He hopes that the REIT structure will encourage investment in Irish property, including residential property, and allow for small investors to participate in high quality investment property assets. He mentioned that the REIT structure may provide one way of attracting new sources of capital to the Irish property market, thereby assisting in the unwinding of NAMA in the coming years.
The Minister has a vision of Ireland being a centre for the financing and management of international property investment through REIT and other structures. The International Financial Services Centre in Dublin has been a great success story for the country since its establishment in the 1980s. REITs will be added to recent initiatives such as QIFs, legislation to facilitate Islamic finance, and also Green finance to encourage the international financial services industry in Ireland. The Ireland/US double tax treaty and the recent agreement on FATCA will assist.
Miscellaneous – NAMA, Regeneration, Aviation and Farms
The Minister noted that the National Asset Management Agency was providing €2 billion of funding over the next 4 years to complete residential and commercial projects in Ireland, with €650 million already approved. He stated that a further €2 billion of stapled finance will be made available to purchasers of commercial property during the same period.
The Minister announced that the Grangegorman Development project will start in 2013. This is a major urban regeneration project. The Minister is considering how to target incentives for areas needing regeneration.
The Minister has announced an accelerated capital allowance scheme over 7 years to encourage the development of aviation facilities in Ireland. The scheme will be in place for 5 years.
If one sells a farm between 1 January 2013 and 31 December 2015 and reinvests the proceeds in another farm within 2 years then there will be no capital gains tax on the disposal. As this is a State Aid it needs EU approval. There will also be some conditions on who may qualify for this relief.
Capital Acquisitions Tax and Capital Gains Tax
The Minister has announced that the rates of CAT and GCT will increase from 30% to 33% for gifts inheritances and disposals on and after 6 December 2012.
The Minister is also further reducing the tax free thresholds available for CAT. There are 3 categories, Group A reduces from €250,000 to €225,000; Group B from €33,500 to €30,150 and Group C from €16,750 to €15,075.
The Minister also increased deposit interest retention tax to 33%.
Pay related social insurance (PRSI) finances the social insurance fund, which pays for social welfare benefits. The Government has taken a number of steps in recent years to broaden the income base and reduce allowances. By 2014 all unearned income will be subject to PRSI (with some transitional measures applying in 2013) probably at a rate of 4%. This will include rental income as well as investment income dividends and interest on deposits and savings.
The combination of the new residential property tax, additional PRSI and the previously announced reductions in tax reliefs will present new challenges for residential property investors, many of whom are already struggling.