Amid the controversy surrounding the implementation of the new 6% rate of stamp duty on commercial property, there was precious little discussion about a related measure announced in last year’s Budget. To try and further assist in the timely delivery of new housing stock, the government confirmed that it would refund a portion of the stamp duty charged (4%), on development land, to purchasers who ultimately use it for the construction of new housing units.
Finance Act 2017
A certain amount of detail has been provided in the recent Finance Act, which was signed into law by the President on 25 December 2017. It is expected that formal Revenue guidance will issue in due course but, for the moment, the legislation provides a broad framework for the operation of the scheme.
The key points are as follows:
- residential development must commence within 30 months following the purchase of the property but no later than 31 December 2021;
- it applies to development consisting of the construction of dwelling units not the refurbishment or completion of existing or partly built units;
- development must commence on foot of a Commencement Notice which has been served in accordance with the Building Control Regulations;
- the development must be completed within 2 years of the acknowledgment of the Commencement Notice by the relevant Local Authority;
- there is a requirement that 75% of the land, forming the subject of a refund claim, is comprised of dwelling units or that the gross floor space of the dwelling units amounts to at least 75% if the total surface area of the land;
- where development is being carried out in phases, under different Commencement Notices, the refund can be claimed in respect of each phase, calculated by reference to the proportion of the overall lands forming the subject of the Commencement Notice;
- claims will be made electronically (presumably through the Revenue Online Service (ROS)) and will need be accompanied by a Statutory Declaration and other documents/information to be specified.
Timing of Claim and Clawback
The 4% duty can be reclaimed following the commencement of the works. If the land is being developed in phases, it can be reclaimed on commencement of each phase in proportion to the land area in each phase.
The refund will be subject to clawback provisions if the conditions of the legislation are not otherwise complied with, or, in particular, where the works have not been completed within the 2-year deadline. Allowances are made for situations where delays in construction are caused by either a court order, requiring works to cease, or because of certain appeals under the Building Control Act.
Issues for Consideration
For those involved in residential development, the legislation gives rise to several questions and issues:
- If works are commenced on site but all or part of the site is sold on, the initial purchaser, having got the benefit of a refund, may suffer a clawback. In such circumstances, and to control the risks here, it may make more sense to complete and dispose of the development using a form of building licence agreement. This of course may create other tax issues which would need to be carefully considered.
- If sites are subdivided following purchase, under a licence agreement for example, a licensor (initial purchaser), who claims the refund, will need to ensure that the two-year time limit for completion is met by the licensee/contractor. This can be dealt with in the contract documents and inevitably the licensor will require strong covenants on the part of the licensee/contractor in addition to ‘step in’ rights for the licensor.
- Is the 75% threshold too high considering the infrastructure and open space requirements in some residential developments?
- How will the clawback operate in practice? Stamp Duty is a self-assessment tax but the interaction with the current system of Building Control should make it very easy for Revenue to monitor.
It is hoped that, once Revenue issue guidance on the exact procedures to be followed, we will have a clearer picture of how the claims system will operate and, ultimately, how it will impact on the structuring of residential development transactions.
The key driver behind the legislation is to reward those who can deliver housing rapidly - it is not to be seen as a general reduction in stamp duty for residential development land. As a result, the legislation is a somewhat blunt instrument; it clearly envisages and is designed to favour straight forward situations where a site is purchased and developed by the one person over a short period of time. The legislation does not address the nuances and complexity of the transactions encountered in the current marketplace, but it is hoped that the awaited Revenue guidance will provide further clarity.