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Friday, 24th May 2024
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Rigging the housing market Back  
The latest stamp duty measures continue the trend of penalising landlords and tenants of residential property and favouring owner occupiers of residential property.
First time buyers
Hitherto “first time buyers” enjoyed a stamp duty exemption on the purchase of residential property for their own occupation. The property had to meet tight maximum and minimum size requirements but the exemption applied regardless of the value of the property.

In contrast, the first time buyer faced stamp duty rates ranging from 4 p.c. to 9 p.c. if they purchased a second-hand property or a property outside the space requirements for the exemption. The Finance Act extends the exemption for the first time buyer to include second-hand houses.

Logic might have suggested that the identical relief that applies to new houses would be extended to second-hand houses, ie an exemption dictated by the size of the house. Not so - tax draftsmen never like simplicity. Instead, the exemption is defined by reference to the price of the house. Provided the price of the house does not exceed IEP150,000, the first time buyer is exempted.

If the price of the house does exceed IEP150,000 but does not exceed IEP300,000, the first time buyer will be subject to stamp duty at a rate varying between 1 p.c. and 1.5 p.c. less than that which applies to other owner occupiers of similar property. Thus on a house costing IEP300,000, the first time buyer will pay stamp duty of 4.5 p.c., whereas an owner occupier who is not a first time buyer would pay 6 p.c.

Over IEP300,000 cost, first time buyers and other owner occupiers purchasing the property pay the same property rate (7.5 p.c. up to IEP500,000, and 9 p.c. over that figure).

Empty rooms
The exemption and lower stamp duty rates available to first time buyers remains subject to the condition that they derive no rent from the property in the five years following purchase. In the midst of a housing crisis, the spare bedroom must remain empty!

Second time buyers
The stamp duty rates applying to purchasers who are not first time buyers, but are buying for their own occupation, has also been adjusted. The adjustments are minor, being downwards on houses costing up to IEP200,000, and an increase on houses costing more than IEP300,000. These tinkerings were probably not worth making.

Tenants
The big stamp duty news is the flat rate of 9 p.c. applying to purchases of residential property by “investors”. “Investors” means anybody who derives rent from the residential property, including a person letting out the spare bedroom. The 9 p.c. rate of course would apply in any event on a property costing over IEP500,000 and the 7.5 p.c. rate would apply to a property costing more than IEP300,000, whether the buyer is a first time buyer, owner occupier, or investor. The impact of the 9 p.c. rate for investors is therefore greatest on properties costing up to IEP300,000.

Temptations
In the May issue of Tax Monitor it was pointed out that linking stamp duty relief to the exclusion of all tenants from a property placed considerable temptation in the way of many first time home buyers. They had to choose between a stamp duty relief, and obtaining some help with meeting mortgage repayments. It is a situation that may tempt some into tax evasion. Once having taken a tenant, not only will they be tempted not to pay the additional stamp duty, but from fear of losing their stamp duty relief, may be tempted not to report the rental income. Too great a temptation should not be placed in front of vulnerable people.

Real reform needed
The new stamp duty measures take no account of the role stamp duty plays in creating a “sticky” housing market. Many people spend their entire lives living in the same house. To move house is very expensive, mainly by reason of the stamp duty costs involved. Stamp duty is an obstacle both to trading up and to trading down. It is an obstacle to labour mobility within the economy.

We have seen in the case of other taxes that reduction of rates leads to increased economic activity and increased tax yield. Has the time come to consider ending the complex web of stamp duty rates and reliefs and replacing them with a single flat low rate of stamp duty (2 p.c.)?

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