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Monday, 10th August 2020
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In praise of the lodger Back  
Ireland has been experiencing a housing crisis. Many people wishing to buy their own home find it unaffordable. The tax system has been used to discriminate in favour of home buyers and against those letting accommodation. Is this wise?
The original drive to control house prices had one important element. It was to eliminate the ‘investor’ from the market.

Logically, removing part of the demand while supply remains fixed would reduce house prices. It seemed to make sense.

But reducing demand by investors reduces supply for the rental market, and that raises rents. Increased rents attract in more investors. So the breathing space purchased for the home buyer was brief.

There is another peculiar aspect to the tax system which impinges on house buyers. In reality there never was a time when the first time buyer (taken as a whole) could easily afford his first house. It was always a struggle. The traditional method of easing the pain was to take in a lodger.

Nowadays the term ‘lodger’ has almost vanished from the vocabulary. We refer to ‘sharing’ but the concept is the same.

A second way of easing the pain for the first time buyer is a stamp duty exemption on the purchase of houses or apartments not exceeding a certain size. But this fiscal incentive to the new home buyer conflicts with the traditional method of subsidising home purchase - the lodger. The stamp duty relief is not available unless the first time buyer certifies that he will not obtain rent from the premises in the five years that follow the purchase.

If he does derive rent, not only will the stamp duty become payable, but interest on it at the rate of 1% per month from date of purchase becomes payable. And of course he is liable to income tax on the rent he derives without any relief against the rent for the interest on borrowings to purchase the house.

Why the hostility to ‘the lodger’ in the stamp duty relief?

Why should it be such a punitive reaction to a hard pressed home buyer seeking some relief by letting out the spare bedroom? It doesn’t make a lot of sense. The relief in any event requires that the house be used as the principal private residence of the purchaser, so the relief would not be available to a pure investor. Nor could it be available to a person in relation to more than one property.

The UK, in contrast to Irish hostility to ‘the lodger’, actually offers tax incentives to encourage him. The UK relief applies to individuals who let out furnished accommodation in their principal private residence. Provided their income from this source does not exceed Stg£4,250 p.a. the amount is tax free. There is a marginal relief for higher sums.

This relief not only encourages efficient utilisation of the housing stock, but recognises that the area is one which may tempt an otherwise honest person to be a tax evader. Too great a temptation should not be placed in anyone’s path.

Perhaps the time has come to reconsider the fate of ‘the lodger’.

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