The Irish Times - Thursday, December 16, 2010
Section 23 investors 'may face bankruptcy' over tax bills
Some Section 23 investors who bought properties with 10-year tax breaks are now facing unanticipated tax bills in the new year
THE withdrawal of Section 23 tax shelter reliefs by the Government from January 1, 2011 will leave many property investors unable to pay their tax bills and will see some go bankrupt, says estate agent Keith Lowe, chief executive officer of Douglas Newman Good.
While there may be limited sympathy out there for the woes of property investors, Lowe believes those most affected by the withdrawal of this tax relief will not be builders and speculators but relatively small-time investors with a maximum of three to four properties.
Investors can continue to offset capital allowances against rental income from their Section 23 property, but can’t use them to shelter rental income from other properties.
With an election looming, the Government is seen by many in the industry to have side-stepped the issue of a full blown property tax, instead targeting investor reliefs because they are likely to be less controversial with the general public.
The Government may have underestimated the strength of feeling out there among investors. The Irish Property Owners Association has vowed to mount a legal challenge to the move and senior legal and tax figures have said it is open to constitutional challenge, saying the Government can’t legally impose retrospective taxation.
Martin Whelan of the Construction Industry Federation says that individuals and companies acquired properties on the basis of tax allowances set down by the state “and it will have a knock-on effect on people’s abilities to manage their financial affairs.
“People used offsets to keep their businesses viable, and you can say what you want about that but the reliefs were introduced by the state and people planned their affairs on that basis.”
Mr Lowe, who has written to the minister outlining his concerns, says he is not against the introduction of a property tax. He has sold a lot of Section 23 properties over the last number of years to people who will now be left with properties they’ve paid a premium on in locations they would not otherwise have chosen to invest in.
While the stock of Section 23 properties around the country has dwindled, there are still some for sale in Dublin and quite a few around the country in the midlands, Waterford and in the west of Ireland. The further you travel out of Dublin the more are available.
Revenue does not have a figure for the number of Section 23 units in the country but in the last 10 years, the Department of the Environment has issued compliance certificates on 33,751 properties eligible for Section 23 relief. If owners sell the unit before the 10-year tax relief period has elapsed, the unit is subject to a clawback of reliefs, and according to Lowe, “people won’t have the money to pay it”.
Granting the remaining tax allowances on these schemes continues to cost the state up to €400 million per annum, according to estimates.
Revenue says it doesn’t have figures on the number of Section 23 residential units in the country but says the cost to the exchequer of urban and town renewal tax incentives alone between 2004 and 2008 was €669 million.
David Cantwell of Hooke MacDonald, which sold a large proportion of Section 23 residential units during the boom, says the proposal to terminate and alter the scope of the reliefs “will cause widespread hardship to numerous people who acquired qualifying properties in good faith never believing that the reliefs could be reneged on in such an unfair manner.
The Government has already received significant tax revenues on these properties in the form of stamp duty and Vat.” He says the worst affected will be those who are already struggling to survive who will be sent “ over the brink”.
In 2008, Hooke and MacDonald published a brochure telling investors it was “a very good time to buy as there is evidence of an imminent shortage of qualifying properties now that the deadline has passed”.
It promised “great tax savings for investors” saying “Section 23 relief can wipe out your tax bills on all existing or future rental income”.
Hooke MacDonald says the only Section 23 scheme it has left in Dublin is Cameron Court on Cork Street, Dublin 8, a development of 76 apartments with 65 per cent reliefs. The final phase is being sold by the receiver. In 2008 the asking price for two-bed apartments was €360,000; it has since dropped to €195,000.
Keith Lowe says that people who’ve bought Section 23 residential units did so in locations that were being regenerated and not considered to be prime .
“Some of these people wouldn’t have bought into schemes if there was no tax relief, and now they are being told the tax relief isn’t available.”
The premium to buy Section 23 properties has been as high as 25-33 per cent. “In recent years the percentage was lower but four to five years ago you were paying a third more than the owner occupier value.” On a property valued at €300,000, this was a premium of up to €100,000.
Agents reckon there will be repercussions for the property market: some tax-based investor schemes survived only because investors could fund bank interest payments through the savings generated from capital allowances. “There will also be an impact on Nama-owned properties as it will impact the values of of a lot of their properties,” says Keith Lowe.
Monday, December 20, 2010
Section 23 investors 'may face bankruptcy' over tax bills - The Irish Times - Thu, Dec 16, 2010