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More property confusion Back  
The Finance Bill once again stars the Minister for Finance as the master market manipulator, moving the property market now one way, now the other way. The Finance Bill seeks to move the property market in so many different directions, it runs the risk of a pile-up.
Residential property
The Minister’s approach to the residential property market is confusing. Hopefully it is not also confused. At first sight the Minister appears to be encouraging property investors back into the market, and to be focusing them on second-hand properties.

This might be gleaned from the fact that he has introduced a special relief for the refurbishment of older residential rented properties, and reintroduced an interest deduction for multiple occupancy ‘pre 63’ properties, subject to conditions.

These two measures appear to tie together nicely. They appear to direct the investor to the older ‘red brick’ property in multiple occupancy and encourage him to refurbish it and restore it.

This move would seem quite sensible in view of the scarcity of flats and rented accommodation, which has been partly brought about by the Minister’s previous efforts at market manipulation. The measures appear to be directed towards those properties that estate agents usually describe euphemistically as ‘of interest to builders.’ By bringing such properties back into use, the overall supply is increased and therefore the measure is sensible.

But having given this clear signal to the property investor, the Minister now raises a confusing counter signal. He has dropped the rate of stamp duty for investors purchasing new properties, but left the rate of stamp duty at the flat penal rate of 9 per cent for those buying second-hand properties. This is an unusual application of the principle of ‘carrot and stick.’ The carrot of refurbishment allowance and interest deduction is offered on the one hand and those seeking to eat the carrot are beaten with the stick of stamp duty.

Refurbishment and interest
The refurbishment allowance provides a write-off over seven years of the costs of refurbishing rented residential property. The write-off is at the rate of 15 per cent per annum for six years, and 10 per cent in the seventh year. The allowance is needed because expenditure on the refurbishment of a second-hand property is not a deductible expense where it is incurred before the purchaser of such a property has installed a tenant in it. Such refurbishment expenditure is regarded as being capital in nature and therefore non deductible.

The refurbishment allowance is available only where the house meets various statutory requirements regarding standards. It is not available where the expenditure is incurred to convert a property not previously a house into a house. If the property is disposed of within ten years of the expenditure being incurred, the allowance is clawed back and passes to the purchaser.

The restoration of interest relief to pre 1963 properties is only in relation to those properties purchased on or after 15 January 2001. A major fly in the ointment is that the interest relief is available subject to a requirement that at least 50 per cent of the property be let to a Local Authority housing department, or to persons receiving social welfare housing subventions.

Whereas the refurbishment allowance described above is not available where the expenditure results in the conversion into a house of a building not previously a house, the Finance Bill also introduces the ‘living over the shop’ scheme. That provides an allowance for - exactly what the refurbishment allowance forbids! The living over the shop scheme provides a tax write-off for the cost of converting the upper floors of commercial premises in certain streets from commercial use (or in many cases no use whatever) into residential use. So conversion is good sometimes, not good other times.

The living over the shop scheme applies to a very limited range of streets in Cork, Dublin, Galway, Limerick and Waterford. The streets have not yet been officially designated.

More tinkering
There are further examples of what may be characterised either as rapid and sensitive reactions to market conditions, or as proof of confusion in policy. The anti speculative tax, a
2 per cent per annum tax on certain ‘second homes’ has been abolished before it ever came into operation. Likewise, 60 per cent capital gains tax rate on residential development land, due to come into operation in 2002, has been abolished without ever coming into operation.

The influence of the EU has been felt in the Finance Bill. The park and ride investment incentives have been diluted by restricting allowances to non-office premises in use for retailing goods or providing services within Ireland (but not including mail order or financial services). This substantially reduces the attractions of park and ride facilities.

Other property measures
The Minister has introduced capital allowances over seven years (15 per cent per annum for 6 years, 10 per cent in the seventh year) on the construction costs of certain private hospitals. The start-up date has not yet been announced.

The hospital in question must be operated by a charity. It must have at least 100 inpatient beds, an operating theatre and relevant facilities, and has to provide medical services in at least five areas out of a specified range. At least 20 per cent of its capacity has to be made available to a health board. The charge for this must not exceed 90 per cent of the fees being charged to private patients.

Any part of the hospital in use as consultants rooms will not qualify for the allowances. This may make one wonder what the Minister supposes goes on in a consultants room, which is different from what goes on at the patient’s bedside, or in the operating theatre. Is the Minister anxious that patients should receive attention only when they are in a bed, but not when they are in a chair opposite the consultant’s desk?

Private hospitals in Ireland traditionally were operated by charities ie ‘the nuns.’ Nowadays nuns are rather scarce on the ground. It is not clear why the Minister should discriminate against hospitals operated on a commercial basis, for profit. Is there something wrong with profit? The medicines and equipment used in the hospital are provided by businesses operating for profit. The building will be built by a firm operating for profit. It will be designed by a firm of architects operating for profit. And the consultants in it will certainly be operating for profit. What then is the problem with the hospital operators being interested in profit?

Jim Clery is a Partner in KPMG.

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