| Property Tax Measures |
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| The Minister’s attack on reverse premiums and on VAT on leases overshadows a large number of property provisions in the Finance Bill. Increasingly tax incentives for property are curtailed, and tax obstacles to property transactions remain. |
Reverse premium
The Finance Bill has imposed a charge to tax on the payment of a reverse premium in a property transaction. It treats it as if it were a payment of rent. A reverse premium could be described as a premium paid by the present owner of property to a prospective owner. It is usually paid by a landlord to induce a tenant to take on a lease. In some cases the reverse premium may reflect the market power of a would-be tenant eg an anchor tenant in a development, or it may reflect the fact that the rents proposed exceed market rates.
When the Minister first announced this idea it was stated that it was with a view to bringing about symmetry between the treatment of the reverse premium as a tax-deductible expense, and its treatment in the hands of the recipient. In many instances a reverse premium was not liable to tax in the hands of the recipient. What the Minister has done is to make sure that it is taxable in the hands of all recipients.
But this does not achieve symmetry. Where a reverse premium is not paid in the course of a trade or profession there is no tax deduction for it. A straightforward landlord who is not a dealer in property would not obtain a deduction for a reverse premium. The Minister has not thought about symmetry. He has just changed the asymmetry to favour the Revenue Commissioners.
Generally a reverse premium will in future be taxed as if it were rent. However if it is received by a person in the course of a trade or profession it will be treated as trading or professional income. It is quite important that it should be trading or professional income rather than rental income, since in the hands of the company rental income is chargeable to tax at 25 per cent (in contrast to the 16 per cent rate applying to trades) and may be subject to a further surcharge if it is a close company that would bring the effective tax charge up to 40 per cent.
By making a reverse premium taxable in all circumstances, but tax deductible in some only, the Minister may have sounded the death knell to the reverse premium. It is a pity he did not do what he originally said he would, ie bring about complete symmetry and therefore not only make the reverse premium taxable in all circumstances, but also tax deductible in all circumstances.
VAT on Leases
The VAT cost of acquiring new property is especially heavy for exempt businesses eg the health and education sectors and financial services sector. Where a long lease is granted, the grant of the lease is treated as the supply of the underlying property. For VAT purposes the property for lease must be valued in order to calculate the VAT.
Previously three alternative methods of valuation were provided for in the VAT Acts. One of these was open market value as determined by a valuer. Where a building was highly specialised (eg an operating theatre for a hospital, or lecture theatres for a college) the open market value of the building once constructed might be less than its cost of construction. That also could arise if the needs of a particular business caused the building to be built in an area where there was little alternative demand for such a building.
Where such an open market value which was less than the cost of construction applied, it was possible that the VAT cost of taking the lease might be less than the input credits available on its construction. The Minister has now brought in anti avoidance to restrict this possibility of mitigating VAT.
It is understandable that the Minister wants as much revenue as he can get. It is less understandable why he felt that the health and education sectors, which are largely State funded, are a suitable area from which to extract it.
It remains to be seen whether or not the provisions have closed up every method of minimising VAT on property acquisition by an exempt person.
Slices of Bacon
The roll back of the various tax interventions in the housing property market of the last few years continues. In the Committee Stage debates the Minister claimed that the measures had been successful. Unfortunately the measures are not being fully rolled back.
The restoration of an interest deduction to all investors in property is welcome. That move, and the removal of stamp duty discrimination against investors in residential properties has already had its impact in the property market place. Anecdotal evidence denotes that there is a new buoyancy, which hopefully will feed through to an increase in building starts.
The removal of the anti-investor stamp duty measures may sound good, but it is as well to remember that prior to 23 January 1997 the top rate of stamp duty applying to a transfer of property was 6 per cent where the consideration exceeded ?60,000 (approx ?75,000). Today the top rate stands at 9 per cent in relation to properties over ?635,000. At the same time the 6 per cent rate does not kick in until the consideration is equal to at least ?317,501. What has occurred is a substantial shift in stamp duty rate scales, lowering the burden of stamp duty on lower priced properties, and significantly increasing it on higher priced properties.
Many homeowners are reassured by the thought that their principal private residence enjoys an exemption from capital gains tax when it is disposed of (in most instances). But for a home owner who contemplates trading up to a property costing over ?635,000 the penal 9 per cent stamp duty rate applied to gross consideration for the new property will probably entirely undo the benefits of the capital gains tax exemption on the sale of the previous property.
Capital allowances on property
The Finance Bill extended the qualifying period for several property renewal schemes – urban renewal, park and ride, rural renewal, multi storey car parks, and student accommodation. It liberalised the requirements for capital allowances on certain private hospitals (still awaiting EU approval) and extended capital allowances to sports injury treatment clinics and to sheltered housing attached to a nursing home.
All that sounds positive but the reality is that much of the attractions of capital allowances on property have been removed by various restrictions imposed either by the EU, or by the Department of Finance. One of the most striking examples of EU intervention with capital allowances is the newly introduced requirement that allowances on hotel projects costing more than ?50m require prior EU approval. At the EU’s behest those involved in the operation of a hospital are excluded from availing of capital allowances in respect of that hospital. That eliminates some of the most obvious investors in such a project.
In the context of the set off of surplus allowances against non rental income our own home grown restrictions on the maximum number of investors who may come together for any one investment (broadly 13 persons) and the limit on offset of ?31,750 per annum and the restrictions on the use of losses by trading partners who are not full time partners are self imposed problems. It is unfortunate that we impose these restraints on ourselves.
There are sound economic grounds for giving tax relief for expenditure on specialised buildings such as nursing homes, hospitals and hotels. These are not the type of high profile investments that can raise finance in competition with office blocks or apartment blocks. |
Jim Clery is a Tax Partner in KPMG.
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| Article appeared in the March 2002 issue.
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