Tax

The changing face of property investment

Apr 03, 2018
Land has always been close to the hearts of Irish people. It’s also close to the heart of the taxman, writes Peter Vale.
Whether you are a small Irish private investor or a large overseas buyer, there have been significant changes to the taxation of your Irish property investments income, both rental profits and capital gains. In this article, I will take a helicopter view of the new landscape and what it means for investors.

Private investors

While much of the media focus is on large overseas investors in the Irish property market, the smaller investor has also seen changes in recent years. Income tax rates have risen while rents can now also be subject to PRSI, as well as USC. The after-tax yield from an investment is therefore less than it was. Capital gains tax has also increased from 20% in 2008 to 33% in 2018. With no relief for inflation, you can pay a substantially higher tax even where there’s no economic gain.  
In good news, common sense prevailed last year and the restriction on mortgage interest relief for landlords is now being phased out, and private investors can also avail of the valuable Home Renovation Incentive to potentially recoup 13.5% of the costs of improvement works.
It’s also good to remember that the Rent-a-Room Relief is still alive. You can earn up to €14,000 tax-free if you rent out a room in your main residence.
On the downside, there are now very few Section 23-type investments available to shelter rental profits, although the Government is not ruling out future tax breaks aimed at particular areas of the market, which seems sensible. For investors looking to diversify risk (and invest via a tax-efficient vehicle), Ireland has enabled investments through a REIT structure, similar to other jurisdictions, since 2013.
So, all in all, it’s a very different landscape than before. While there have been some improvements, the tax changes have made it less attractive to be a landlord, which is disappointing given the current shortage of rental properties.

Overseas investors

It might seem unfair, or even surprising, that a UK investor in Irish property does not suffer the same level of tax as an Irish investor. A UK investor earning Irish rental income pays only 20% on the rental profits; less than half of what a typical Irish individual investor pays.
Even for investments through companies, an Irish company is liable to tax at 25% on rental profits while a UK company pays only 20% on the same Irish rental profits, with no close company surcharge to be concerned about. Obviously, the UK investor, be it an individual or a company, has to consider the UK tax consequences of an Irish property investment, but it is interesting how the Irish tax position differs for Irish and foreign investors.
On the capital gains tax front, given the importance we attach to Irish land, the broad thrust of our legislation is that all investors, Irish or foreign, must pay tax on the disposal of Irish property. The rate of tax depends on a number of factors but it is generally 33% for all (although this can differ for overseas investors depending on certain factors).  
However, prior to Finance Act 2016, regulated funds could invest in Irish property and receive both rental profits and capital gains free of any Irish tax. Investments through special purpose vehicles set up under Section 110 TCA 1997 could also broadly achieve the same result. However, Irish investors in such funds did not receive the same benefits as overseas investors as an exit tax applies in the case of pay-outs to Irish investors.
Political pressure saw the position change dramatically in Finance Act 2016, with a new 20% withholding tax applying to profits paid out to overseas investors (although certain classes of investor still retain effective exempt status). So, to a certain extent, there is now a more level playing field from a tax perspective for Irish and overseas investors.
The changes made in Finance Act 2016 were in effect retrospective, with historic gains brought within the new tax charge and limited scope in some cases to crystallise those historic gains tax-free. That treatment might seem unfair, as investors would initially have entered into a purchase with a now invalid set of assumptions around the nature of tax costs on exit. Whatever the view people have of profits made by overseas investors in Irish property, nobody wants an environment where overseas investors of any kind are nervous about what tax changes might be coming down the line. Uncertainty kills markets and can spread.

Conclusion

In short, both small and larger investors have seen significant changes in recent years to how their Irish property investments are taxed. In my own view, we will see further changes in years ahead in response to specific market needs, particularly around rented residential accommodation.
 
Peter Vale FCA is a Tax Partner at Grant Thornton.