| Secondment abroad may be the occasion for renting out an employee's Irish home. What are the tax consequences? |
A person seconded abroad and already owning a home in Ireland faces the decision as to whether to sell that home; rent it out, or leave it empty while he is abroad.
If only for security reasons, leaving a property empty is not an attractive proposition. The choice may therefore be one between selling, or renting.
The seconded employee may be surprised at the tax complications which this choice can create.
Stamp duty
It is quite likely that the seconded employee will have received the benefit of some stamp duty reliefs on acquiring his house. On transactions prior to 15 June 2000 he may have availed of an exemption on the purchase of a new property not exceeding 125 square metres; or the reduction in stamp duty on new properties exceeding that size.
If the house was acquired from 23 April 1998 onwards, those exemptions are lost if in the succeeding five
years the house is rented out (without having been previously sold).
On transactions from 15 June 2000 exemptions were reduced and instead reduced rates of stamp duty can apply to first time buyers or to others buying as a principal residence. These exemptions and reduced rates can also be lost if within five years the house is rented.
The bad news is that the rate of stamp duty which will effectively apply on the house being rented out in that five year period will be 9%.
If for example on 30 June 2000 the employee purchased an apartment in Dublin as his principal private residence, and paid IEP150,000 for that apartment, he is likely to have been exempt from stamp duty on the purchase. If he now finds that he is seconded to New York and contemplates sub letting the apartment, he will face a stamp duty bill of IEP13,500! This penalty would apply even if the sub-letting was for quite a short period eg six months.
If the seconded employee has been lucky enough to be able to afford a more substantial property purchase, with the apartment costing IEP300,000, he would initially have paid stamp duty at the rate of 6% (costing him IEP18,000 at the time). Any sub-letting of the apartment now while he is abroad would cost an additional 3% of stamp duty ie IEP9,000 more.
The size of these penalties are such that in many cases they will deter the seconded employee from sub-letting the property while he is away. It may make more sense for him to leave the property vacant than to sub-let it. This is a very curious result from legislation designed to ease a housing crisis.
Anti speculative property tax
All the news is not bad! At least the employee will not be subjected to anti speculative property tax by reason of either leaving the property vacant, or sub-letting it. That tax would only apply to a property acquired from 15 June 2000 onwards in any event, and there is an exemption from it where an individual is prevented from occupying his principal private residence by reason of the location of his employment.
Where the secondment is within Ireland, the exemption applies for a four year period only but no such limit applies where the secondment is out of Ireland.
Tax on rents
Any rental income derived from the apartment (if the decision is taken to sub-let) will be taxable. In most instances the tax will be at the standard rate of tax only but if the other Irish source income of the seconded employee were large enough, it could be liable at the higher rate of tax. No deduction would be available for the mortgage interest, in computing the taxable rent.
If the tenant is paying the tax directly to the seconded employee (now a non-resident) an obligation would exist on the tenant to withhold tax at the standard rate of tax from the payment. Many tenants would be unaware of this obligation.
Capital gains tax
Neither leaving the apartment vacant, nor sub-letting it would give rise immediately to capital gains tax. But sooner or later the seconded employee is likely to consider selling the apartment. Many people do not stay in the one property for their entire lives.
Normally capital gains tax will not arise on the gain on the sale of a principal private residence. If the house has development potential some capital gains tax could arise on the portion of the gain attributable to that development potential. However even though the apartment may have no development potential, capital gains tax could arise by reason of the earlier decision to sub-let the apartment.
Broadly speaking, the capital gains tax exemption is lost proportionately to the part of the period of ownership during which the apartment was sub-let. Thus if the seconded employee had lived in the apartment for a year; sub-let it for three years; and returned and occupied the apartment for a further two years before selling it, half of his gain would have become liable to capital gains tax by reason of the sub-letting of the apartment.
In contrast, had the apartment been left empty, the period of absence is unlikely to have diluted the capital gains tax exemption on a subsequent sale. This is crucially dependent however on the seconded employee returning to Ireland and occupying the apartment again as a principal private residence for some period prior to sale.
If the apartment were sold after lying idle for a period, without being reoccupied by the seconded employee as his principal private residence, some dilution of the capital gains tax exemption would arise where the period of absence from the apartment exceeded one year.
Overview
Most individuals would consider it sensible, both from a viewpoint of earning some income from the apartment to help meet their mortgage repayments, and from the viewpoint of ensuring the security of the apartment while they were away, to sub-let it. As can be seen, the tax code can impose punitive taxation in such a situation. The result may be that many people would consider it unwise to sub-let.
This is a remarkable result to be brought about by tax legislation at a time of housing shortages. |
John Bradley is a tax Director in KPMG.
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| Article appeared in the October 2000 issue.
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