Monday, March 7, 2011

The taxing issue for property owners | The Post

Anew day, a new dawn.

The people have voted and now hopes are being pinned on the next government to bring some economic and political stability to the country.

It’s a tough challenge, and when the Fine Gael/Labour coalition government publishes its programme for government, the property sector will be closely analysing what is in store.

Every government has affected the housing market to some degree whether for good or ill, from Sean Lemass’ decision to build new housing estates to relocate people from the inner city slums to Fianna Fail’s recent legacy of property tax reliefs. It seems the next government will be no different, but it enters office against the backdrop of an unprecedented property collapse.

What’s ahead for homeowners and investors under Enda Kenny’s government remains to be seen. Property issues such as negative equity or upward only rent reviews on commercial property are emotive and the pressure to make immediate decisions will be intense.

Fine Gael, which has secured 76 seats in the next Dáil has faced criticism from industry representatives regarding its proposal for upwards and downwards rent reviews for all commercial tenants.

Analysts have warned that changes to existing commercial leases could lead to €500 million worth of investment deals being put in jeopardy, though tenants argue that such changes are essential.

The party’s property tax policy for residential homeowners also caused controversy during the election campaign.

So what are the policies both Fine Gael and Labour were elected on and how might they take form once the Dáil gets underway? The policies cover everything from property tax and second homes tax to mortgage interest relief and debt management (see panel on page 2).

The housing market faces a legacy of boom time over-construction, a lack of confidence among buyers about future economic growth (and house price stability), a lack of finance for those ready to take the plunge, and now rising interest rates and the effective removal of most fixed rate mortgages by the banks.

The manner in which a property tax is introduced, and changes to the second home tax and mortgage interest reliefs are made could affect both existing and potential homeowners, as well as investors.

Fine Gael and Labour both proposed increases in property related taxes in the run up to the election. In terms of the existing taxes, such as the non-principal private residence (NPPR) tax or second homes tax as its known, both parties are in favour of an increase.

The flat-rate tax raised €130 million for the last government since it was introduced late in 2008 last year with a charge of €200 per household. Fine Gael wants to increase the tax to €300 per a year, and Labour to €500.

Both parties were vague when it came to their plans on Section 23 reliefs and on the implementation of property taxes.

Fine Gael wants to implement a site sale tax, through the local authorities, meaning different areas could face different rules, but this has caused considerable consternation with some advocating for an annual tax as a fairer means.

The party said local authorities could opt to increase local taxes, increase local charges for waste and services or introduce ‘‘a site sale profits tax’’.

‘‘Such a tax would be levied on the profit made from the site value on the sale of a residence (sales proceeds, less cost indexed by inflation, less stamp duty paid and less home improvements)," according to the party.

Fine Gael’s manifesto stated the final measure might be considered as both fairer and more economically sensible than an annual recurring property tax.

‘‘Whichever option local electorates choose, for the first time since the 1970s local government will have real independence from central government in deciding what services to provide at local level and how to fund them."

Labour accepts that a site value charge is necessary, but says it cannot be introduced in the short term. Instead, the party proposes to publish a Green Paper on how such a charge could be structured in a ‘’fair and efficient manner’’.

Unsurprisingly those in the property industry have not welcomed the range of taxes as outlined in the manifestos.

There’s a general consensus that a property tax is needed but there is anxiety among industry heads regarding the implementation of these taxes as they feel it could cause further deterioration in an already depressed market.

Irish Auctioneers and Valuers Institute (IAVI) acting chief executive Ed Carey said an annual property tax has been recommended over the past 25 years in various reports including the Commission on Taxation reports in 1985 and in 2009 and the OECD Report in 2009.

‘‘We agree that an annual residential property tax is needed to provide a sustainable source of funding to local government.

‘‘However, the tax must be introduced in a fair, equitable and transparent manner.

The proposed site valuation tax should be reviewed and perhaps other methodologies including basing the tax on the size of the property, with certain concessions, could be considered," said Carey.

‘‘A ‘site sale profits tax’ on principal private residences would be a retrograde step and have negative consequences on the property market.

It is in effect another transactional tax when what is needed is a stable and sustainable source of funding for local government.

‘‘It would also be a disincentive for homeowners to sell thus restricting mobility and affecting the supply of property in the market," said Carey.

Ronan Lyons, economist with said a fully implemented annual site value tax, on the other hand, could have relatively important effects on the market, as it could involve a transition period where we move from the current distribution of property to one better reflecting society’s needs, e.g. pensioners selling on their empty nests to those whose need for a home suitable for a family is greater.

‘‘Realistically, though, social pressure will mean that whatever property tax is brought in will probably have an exemption for wealth rich cash-poor households such as pensioners, so it’s unlikely that the property tax will do anything other than increase the bills for each household," he said.

Ultimately, Lyons said it would not be property taxes but the EU IMF deal that would have the greatest effect on a recovery in the property market.

Karl Deeter, operations director with Irish Mortgage Brokers in Dublin said he was in favour of a property tax if it was implemented correctly and if less income tax was paid by taxpayers.

‘‘People would be more willing to spend more if income tax was reduced. It would prove to be productive. ‘‘The second homes tax is an example of revenue raising, the only justification is that it is a tax on owning an asset.

‘‘Literally I could own a castle or a cottage and I’d have to pay a flat tax it’s stupidity.

The introduction of a property tax would have to mean scrapping the second homes tax," he said.

‘‘Otherwise it doesn’t make sense, and the property tax should be offset against investors’ tax bills. The property tax should be allowable as an expense for investors."

Ronan O’Driscoll, head of residential at Savills said the fiscal gap was such that ‘‘some sort of property tax’’ was inevitable, but he said it should be done on a fair basis. ‘‘The second-homes tax was unfair.

Because the government was too lazy to come up with a charge based on the value of the property, they implemented a f lat-rate charge," said O’Driscoll.

There should unquestionably be an allowance made for those homeowners who paid stamp duty in recent years, according to O’Driscoll.

‘‘In an ideal world I’d say there shouldn’t be a property tax as a principle but I’d be naive to think we’d get away with it.

‘‘If they’re going to implement one a value based way is the best way to do it because otherwise if it’s based on size, a six-bed house in Cavan would pay the same as a three bed house in Dublin."

The Savills director said a property tax would have to be centrally controlled if its implemented by local authorities as some local authorities have greater financial problems than others and it could lead to huge discrepancies in the charges being forced onto homeowners.

Marian Finnegan, economist with the largest estate agency in the country Sherry FitzGerald, also recognised the need for a property tax, saying every economy needs to draw revenue from property.

‘‘In the past Ireland had chosen to do so through transaction tax, stamp duty. It was used largely as a crude mechanism to control demand. It was damaging to the industry as it was effectively a barrier to entry to the established housing market.

‘‘That said it was at one point a significant if volatile source of revenue which needs to be replaced. A property tax in whatever guise is therefore a necessary tool for revenue generation. If it is to be acceptable it needs to be equitable and homogenous.

‘‘A local authority tax may be more easily digestible rather than a central government tax but the determination of the charge should be centrally advised if not controlled."

At the Institute of Professional Auctioneers and Valuers (IPAV) offices on Lower Baggot Street, chief executive Fintan McNamara said he was concerned about the property tax proposals as it would further delay a recovery.

The second homes tax was ‘‘too much of a blunt instrument’’, he said. ‘‘We would want to see some amelioration in blunt proposals."

‘‘There has already been an increase for landlords in the PRTB registration of each tenancy to €90.

They need to do a lot more research before they implement anything." Otherwise he said it could be disastrous for both homeowners and investors. ‘‘Property taxes are effectively stealth taxes. It won’t help any recovery in the market."

Section 23 tax reliefs

When the government introduced changes in the last Budget to effectively remove Section 23 reliefs it was met with an outcry from small time residential property investors.

It led to a u turn on the change where the changes have been deferred until an impact assessment survey is conducted. McNamara said the attempt to remove the reliefs prematurely was worrying.

‘‘Both McNamara and Carey said they would hope FG and Labour would await the outcome of the assessment and allow the reliefs to waste away themselves. But Labour has already outlined that it wanted to eliminate legacy property reliefs immediately.

‘‘There was this perception that it was developers that the reliefs were benefiting when in fact it was normal people such as nurses, Gardai that were encouraged by the government to invest and use it as a pension fund," said McNamara. ‘‘They bought the benefits, they’re entitled to the reliefs."

IAVI’s Carey said ‘‘it was acknowledged that property tax reliefs will need to be removed in due course’’, but he said it was important that the economic impact assessment on the proposed changes is undertaken in advance of any abolition of the reliefs."

Commercial rents reviews

According to the property industry, the most worrying of all proposals by Fine Gael and Labour relates to commercial rent reviews.

Up to €500 million worth of Irish commercial property sales could be lost this year because of the promises by the Fine Gael and Labour parties to ban upward only rent reviews in leases that have already been agreed, property sources argue. IPD analysis showed that values of investments could fall by 19.4 per cent, or just under €500 million if immediate rent review were permitted and current leases are scrapped.

John Moran, managing director of Jones Lang la Salle, described the proposal ‘‘as a very crude mechanism’’ to resolve a problem that in reality is not as great as people perceive.

‘‘It has the unintentional result of favouring a significant amount of multi-national occupiers who frankly have no requirements to have their rents reduced.

‘‘I am sure the likes of Tesco, McDonalds, H & M and Zara would only be delighted to have their rents reduced at ultimately the expense of the Irish taxpayer," he said.

Moran said the market was already self-regulating with the vast majority of landlords adjusting rents downwards to help genuine tenants who are in cash difficulties.

‘‘The proposal at the moment switches the balance of power totally in favour of the tenant.

‘‘All European leases have alternative CPI increases which is not proposed here and where the rent cannot go down over the duration of the occupancy of the premises. Furthermore, the fact that tenants have rights to new leases at the end of five years of occupation further sways the equation in their favour.

‘‘The proposal will lead to a reduction in capital values in investment portfolios of in the order of 25 per cent to 30 per cent.

‘‘This undoubtedly will have serious impact on Nama and potentially induce a secondary banking crisis similar to that occurred in the UK in the 1970s when rent freeze Legislation was introduced."

However the incoming government parties have also been strongly lobbied by retail interests which dispute this view and argue that upward only reviews must be ended to save jobs in the retail sector.

Labour has said that the measure could save 15,000 jobs and it is also part of Fine Gael’s policy platform.

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