Revenue Note for Guidance

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Revenue Note for Guidance

97 Computational rules and allowable deductions

Summary

This section provides the principal rules for the computation of profits/gains chargeable under Case V of Schedule D. Also set out are the deductions allowable against Case V income.

By virtue of section 75(4), expenses incurred in the letting of a premises on a uneconomic basis are not deductible.

Details

Computational rules

(1) Income chargeable to tax under Case V of Schedule D is computed on the gross amount of any rent receivable. The amount of the surplus or deficiency from each rental source is calculated separately by making the deductions authorised by this section. The total Case V income in any year is the aggregate of the surpluses so computed reduced by the aggregate of the deficiencies so computed.

Deductions

(2) In determining the income chargeable under Case V of Schedule D, the following deductions are allowed:

  • rent payable on the property by the person chargeable,
  • rates payable on the property by the person chargeable (either in accordance with the terms of a lease or as an expense of the agreement under which the rent/receipts were received),
  • the cost of goods provided and services rendered by the person chargeable in relation to the letting of the property (where such person is either legally bound under the lease to provide such goods and services or the provision of such goods and services constitute an expense of the agreement under which the rent/receipts were received),
  • the cost of maintenance, repairs, insurance and management of the premises borne by the person chargeable and which constitute an expense of the agreement under which the rent/receipts were received, but excluding any capital expenditure,
  • interest on money borrowed to purchase, improve or repair the premises.

(3) Deductible expenses are only allowable to the extent to which they would be allowable under the provisions of Case I of Schedule D if the receipt of rent were treated as the carrying on of a trade during the currency of the lease or during the period which the lessor was entitled to the rent. For this purpose, the currency of a lease includes a period after the end of a lease and before the commencement of a new lease, where the lessor was not in occupation of the premises but was entitled to possession of the premises.

Restriction of relief for interest on borrowed money

(2A) Relief was not allowed for any year in respect of interest on borrowed money employed on or after 23 April 1998 to purchase, improve or repair premises if at any time in that year the premises was residential premises (subject to subsections (2B) and (2C)). Subsection (2G) restored relief on such interest accruing on or after 1 January 2002. However, subsection (2J) reintroduced, between 7 April 2009 and 31 December 2018, an interest restriction for rental income from residential premises.

Non-application of restriction of relief for interest

(2B) The restriction of relief for interest on borrowed money employed on or after 23 April 1998 did not apply to —

  • borrowed money employed on or before 31 March 1999 to purchase a residential premises where the premises is purchased in pursuance of a contract evidenced in writing before 23 April 1998.
  • borrowed money employed in the improvement or repair of premises which on 23 April 1998, or at any time in the preceding 12 months, were rented residential premises and the person chargeable owned the property on 23 April 1998, or had entered into a contract which was evidenced in writing before 23 April 1998 to purchase it and the purchase money was paid over before 31 March 1999.
  • borrowed money used to purchase, improve or repair —
    • qualifying holiday cottages/apartments located in the designated seaside resorts – Chapter 4 of Part 10, sections 352 and 353;
    • any premises, other than premises located in the designated seaside resorts, the site of which is wholly within a qualifying rural area as defined in Schedule 8A;
    • holiday cottages/apartments, other than those coming within designated seaside resorts or qualifying rural areas, which are registered with Fáilte Ireland or listed in a Regional Tourism Guide and where planning permission – which must have been applied for before 23 April 1998 – restricts use to short term residential use not exceeding two months at any one time by any one person;
    • properties converted into multiple residential units before 1 October 1964 (“pre-1963 property”).

Site and construction costs

(2C) Where a person does not purchase a residential premises in its entirety but has or acquires a site and then arranges for the construction of a dwelling on the site, the money employed is deemed to be the purchase of a residential premises. Where this deeming provision applies, subsection (2B)(a) will only apply where the borrowed money is used by 31 March 1999 and where —

  • any contracts for the purchase of the site and the construction of the dwelling have been evidenced in writing before 23 April 1998, or
  • if there is no contract for the construction of the dwelling, the foundation for the dwelling was laid in its entirety before 23 April 1998.

Apportionments

(2D) Where rents arise from a mixed commercial/residential premises, any relief in respect of interest on borrowings relating to the commercial portion – which is not restricted – will be on a “just and reasonable” basis.

Change of use of principal private residence

(2E) Where a house which is used as a person’s sole or main residence at any time on or after 23 April 1998 is subsequently rented out, no relief against rental income will be granted for any year or part of a year after it becomes a rented property irrespective of when the money was applied.

Interest relief in relation to “pre-1963 property”

(2F) Interest relief is available on borrowings to purchase, improve or repair rented properties converted into multiple residential units before 1 October 1964 (“pre-1963 property”). The conditions attaching to the relief are as follows:

  • the property must have been converted into multiple residential units prior to 1 October 1964, the commencement date of the Local Government (Planning and Development) Act 1963 (“a pre-1963 property”);
  • the property must have been acquired under a contract evidenced in writing on or after 5 January 2001;
  • in the event of an alteration to the premises taking place after the date of acquisition, the number of units in the property cannot, subject to the following condition, be reduced to less than 50% of the number that were originally in the property when purchased by the chargeable person;
  • the property must at all times consist of a minimum of three residential units;
  • at all times, except for the periods of temporary vacancy during the change of tenants, at least 50% of the property must be either—
    • let to a local authority or tenants designated by that local authority, or
    • let to tenants qualifying for Social Welfare Assistance payments and at a rent that falls within limitations imposed by the Social Welfare Consolidation Act 2005; and
  • the property must meet certain statutory requirements in relation to—
    1. standard of upkeep of the property,
    2. providing rent-books for tenants and keeping records of rent paid, and
    3. registration of the rental property.

For the purposes of subsection (2F) there are specific definitions of “local authority” and “residential unit”.

Local authority” means the council or corporation of a county or other borough or the council of an urban district in whose functional area the premises is located. By virtue of section 3(2) of, and Schedule 2 to, the Local Government Act 2001, reference in any other enactment to “county borough corporation”, “borough corporation” (not being a county borough corporation), “council of a county” and “council of an urban district”, and to similar or analogous expressions, are now to be construed as references to “City council”, “Borough council of a borough mentioned in Chapter 1 of Part 1 of Schedule 6 to the Local Government Act 2001”, “County council” and “Town council of a town mentioned in Chapter 2 of Part 1 of Schedule 6 to the Local Government Act 2001”, respectively.

Residential unit” means a separately contained part of a residential premises used or suitable for use as a dwelling.

Restoration of interest relief

(2G) Interest relief is restored as a deductible expense in the calculation of tax on rental income arising from residential property. The restoration of the relief applies to interest on borrowed money which is employed in the purchase, improvement or repair of rented residential accommodation where the interest accrues on or after 1 January 2002.

Transfer of property between spouses or civil partners

(2H) Relief is disallowed, as respects interest accruing on or after

  • 6 February 2003 where the let residential premises was purchased from the spouse of the person chargeable in respect of the rental income.
  • 27 July 2011 where the let residential premises was purchased from the civil partner of the person chargeable in respect of the rental income.

The disallowance of interest relief does not apply where the rented property is purchased from

  • a spouse in the case of legally separated or divorced persons.
  • a civil partner when the civil partners are separated under a deed of separation or other legally enforceable arrangement, or where the civil partnership has been dissolved.

Restriction of interest relief

(2I)(a) With effect from 1 January 2006 relief is denied in respect of interest on borrowed money applied in the purchase, improvement or repair of rented residential properties unless the person making the claim can show that the registration requirements of Part 7 of the Residential Tenancies Act 2004 have, in the year for which the relief is claimed, been complied with in respect of all tenancies which existed in relation to that premises in that year.

(2I)(b) Where evidence of registration of a tenancy is required by the Revenue Commissioners for a claim under this section, a written communication from the Private Residential Tenancies Board will meet that requirement.

In circumstances where the property is owned by a company this restriction takes effect for accounting periods beginning on or after 1 January 2006.

Restoration of full loan interest deductibility for residential property

(2J) Section 5 Finance Act 2009 introduced a restriction or limit of 75% on the amount of interest that would otherwise be deductible where a loan is used to purchase, improve or repair a residential property.

Finance Act 2016 provided for the incremental restoration of full interest deductibility by way of annual 5% increases, commencing from 1 January 2017, with full restoration by 2021.

Finance Act 2018 restored full deductibility of interest on loans used to purchase, improve or repair a residential property from 1 January 2019 by removing the restrictions that had been provided for 2019 and 2020.

For the purposes of the restriction, interest is treated as accruing on a daily basis. The restriction does not apply to loans taken out to finance non-residential property and the full amount of interest is deductible in such cases. There is provision for a just and reasonable apportionment of interest in the case of mixed residential and non-residential properties. Where a person arranges for the construction of a dwelling, the combined cost of site acquisition and construction is treated as being incurred on the purchase of a residential premises. The restriction also applies to residential properties constructed under some of the property-based incentive schemes, i.e., registered holiday cottages, nursing home residential units and “section 23” properties, including student accommodation.

Non-application of subsection (2J) for lettings to qualifying tenants

(2K) A person chargeable who rents residential property for a period of three years to tenants in receipt of social housing supports (qualifying tenants) may, notwithstanding subsection (2J), which restricts the deduction for interest on borrowings used to purchase, improve or repair rented residential property, deduct all of the interest accruing during that three-year period when computing their taxable rents from the property in question. The manner in which the additional deduction is given is set out in paragraph (g) below.

(2K)(a) A number of terms are defined for the purposes of this subsection

Lease” means any lease or tenancy in respect of residential premises which is required to be registered by the person chargeable with the Private Residential Tenancies Board (PRTB), now the Residential Tenancies Board (RTB).

Qualifying lease” is any lease or tenancy in respect of residential property granted by the person chargeable to a qualifying tenant;

Qualifying tenant” means a tenant who

  • qualifies for social housing support from the housing authorities, under Part 4 of the Housing (Miscellaneous Provisions) Act 2014 or section 19 of the Housing (Miscellaneous Provisions) Act 2009, or
  • is entitled to rent supplement payable by the Department of Employment Affairs and Social Protection.

Relevant borrowings” are borrowings used in the purchase, improvement or repair of rented residential property which is rented to a qualifying tenant at some stage during the period when interest is accruing on the borrowings. This definition helps narrow the calculation of “relevant interest” (i.e., the additional interest deduction allowed by this subsection) to the interest arising on the residential premises, or the part of the residential premises, that is let to qualifying tenants;

Relevant interest” is the amount of the additional interest that a person chargeable who rents residential property for a continuous period of three years to qualifying tenants and who satisfies the other conditions of this subsection may deduct under subsection (2)(e) in computing their taxable rent from the property in question.

Subsection (2)(e) allows a deduction for interest on borrowings used to purchase, improve or repair rented property in computing the taxable rents from the property. subsection (2J) restricted the amount of the deduction on such borrowings insofar as they relate to residential property. This subsection restores the 100% deduction where the person chargeable meets the necessary conditions.

The “relevant interest” for a three-year period (referred to as a “specified period”) is the difference between the aggregate amount of deductions for interest on borrowings in respect of residential property over the three-year period computed as if all of the interest is deductible and the aggregate amount of the actual interest deductions for the same period having regard to the appropriate restriction imposed by subsection (2J).

For example, a person chargeable (who is an individual) undertakes to rent a residential property to a qualifying tenant for a three-year period ending on 31 December 2018. The interest on borrowings used to purchase the property is €1,000 in each of the tax years 2016 – 2018 inclusive.

The aggregate amount of the interest on the borrowings over the three-year period, computed as if all of the interest is deductible is €3,000, while the aggregate amount of the deductions having regard to subsection (2J), is €2,400*. The amount of the increased interest deduction is €600, i.e. the difference between the two computations.

*€2,400 (€750 + €800 + €850):

  • 2016: €1,000 × 75% = €750 (in respect of interest accrued on or after 1 January 2016 up to and including 31 December 2016).
  • 2017: €1,000 × 80% = €800 (in respect of interest accrued on or after 1 January 2017 up to and including 31 December 2017).
  • 2018: €1,000 × 85% = €850 (in respect of interest accrued on or after 1 January 2018 up to and including 31 December 2018).

Relevant undertaking” means an undertaking given by a person chargeable to the PRTB (now the RTB) in respect of the letting of a residential property to a qualifying tenant. A relevant undertaking is described in paragraph (b) below.

Specified period” is defined as a continuous three-year period commencing at any time on or after 1 January 2016 but not later than 31 December 2019 and allows a person chargeable grant qualifying leases to qualifying tenants at any time during that period. The period of four years ending on 31 December 2019 allows a person chargeable who enters into, or is treated as entering into, a qualifying lease in respect of residential property in 2016 (for that year and the two subsequent years) the option of entering into a further qualifying lease for a three year period commencing in 2019. As relief under this subsection is predicated on a three year lease, the option of a further qualifying lease is not available where lettings to qualifying tenants commence for the first time in 2017 or later.

(2K)(b)(i) A person chargeable who intends claiming relief under this subsection must submit an undertaking in such form and containing such information as the Minister for the Environment, Community and Local Government (now the Minister for Housing, Community and Local Government may prescribe. The person chargeable must commit to renting a residential property to qualifying tenants for a period of three years commencing on —

  • the date of the lease, where it commences on or after 1 January 2016, or
  • in any other case, 1 January 2016, provided the person chargeable is renting the property in question to qualifying tenants on that date.

(2K)(b)(ii) The PRTB/RTB must register a relevant undertaking in the register of private residential tenancies which it maintains under Part 7 of the Residential Tenancies Act 2004. Subject to any modifications, Part 7 of that Act applies to any information relating to a relevant undertaking included in the register as it relates to a residential tenancy in the register.

(2K)(b)(iii) Timelines are set out within which a relevant undertaking must be submitted to the PRTB/RTB as follows:

  • where a lease commences on or after 1 January 2016, the undertaking must be submitted at the same time as the person chargeable is required to register the tenancy in accordance with section 134 of the Residential Tenancies Act 2004 (i.e. within one month of the start of the tenancy).
  • in all other cases, the undertaking must be submitted by 31 March 2016.

(2K)(b)(iv) Subparagraph (b)(iv) is concerned with the situation where a person chargeable submits a relevant undertaking to the PRTB in respect of a specified period and, following the end of that period, submits an undertaking in respect of a further 3-year period. A person chargeable who enters into a qualifying lease during 2016 in respect of a residential property will have the opportunity to enter into a further qualifying lease for the property during 2019.

Firstly, this subparagraph provides that the date on which the second specified period commences (which must be in 2019) is:

  1. the date of a qualifying lease which commences on or after the date following the end of the first specified period, or
  2. the day immediately following the end of the first specified period where the new qualifying lease commences prior to the end of that period.

For example, a first specified period ends on 31 December 2018. If a new lease commences on 1 February 2019, the second specified period will commence on 1 February 2019. However, if a qualifying lease is still ongoing at 31 December 2018, the second specified period will commence on 1 January 2019, i.e. the day after the end of the first specified period.

Secondly, it provides that the relevant undertaking for the second specified period in respect of a qualifying lease commencing after the end of the first specified period must be submitted to the PRTB at the same time as the person chargeable is required to register the new tenancy with that Body. Otherwise, the undertaking must be submitted within 3 months after the second period commences.

(2K)(c) A lease which commences before 1 January 2016 and which would be regarded as a qualifying lease if it were to commence on that date is treated as a qualifying lease commencing on 1 January 2016 where a relevant undertaking is submitted to, and registered by, the PRTB. This provides certainty for a person who, on 1 January 2016, is renting residential property to a qualifying tenant under a lease which commenced before that date, as to when that lease is deemed to have commenced for the purposes of this subsection and is of particular relevance for paragraph (d), which deals with scenarios where qualifying leases terminate before the end of a specified period.

(2K)(d) This paragraph is concerned with the situation where a qualifying lease terminates during a specified period where, for example, the tenant leaves the property and the person chargeable is unable to find a replacement qualifying tenant to occupy the property immediately following the termination of that lease.

Subparagraph (i) provides that the term of a qualifying lease includes the period between the first lease and the replacement lease where —

  • at the end of the intervening period between both leases, the person chargeable grants a new lease in respect of the property to a qualifying tenant, and
  • during the intervening period, the property (or any part of it) is not —
    • let to a tenant who is not a qualifying tenant,
    • occupied by the person chargeable, or
    • occupied by a person connected to the person chargeable, for example, a relative.

In these circumstances, the first lease, the intervening period and the new lease are taken together and treated as one lease for the purposes of ascertaining if the property has been let to social tenants for the specified period in question.

Subparagraph (ii) provides that more than one replacement lease may be granted in respect of a property in the circumstances of subparagraph (i).

(2K)(e) Where a tenant ceases to be a qualifying tenant during a specified period, for example, where his or her circumstances improve, the lease continues to be treated as a qualifying lease (i.e. a lease between the person chargeable and a qualifying tenant) for so much of the period as the tenant continues to reside in the property under the lease.

(2K)(f) The conditions that must be met in claiming relief under this subsection are:

  • a residential property is let under a qualifying lease (which is a lease between a person chargeable and a qualifying tenant) for one or more specified periods. Given the definition of “specified period” there can be no more than two such periods in respect of a property, and
  • a relevant undertaking in respect of the property for each specified period is submitted to, and registered by, the PRTB.

(2K)(g) A person chargeable who satisfies the conditions in paragraph (f) in relation to a residential property may, after the end of the specified period to which the claim relates, make a claim to Revenue to have the deduction provided for in subsection (2)(e) in respect of interest on borrowings used to purchase, improve or repair the property in question computed having regard to the amount of the relevant interest for that period.

For the purposes of computing the appropriate deduction for interest in accordance with this subsection, relevant interest is treated as accruing on the day after the specified period ends. This ensures that as far as possible the undertaking to let the property to qualifying tenants for a 3 year period is fully met before a claim for the additional relief can be made.

For example, take the case of a person chargeable who is an individual where the specified period in relation to a property ends on 31 December 2018. In this scenario, the relevant interest is deemed to accrue on 1 January 2019 and is taken into account, along with the actual interest accrued in 2019, in computing the taxable rents from the property in question of that year.

Subsection (2J), which restricts the deduction for interest on borrowings on residential property does not apply to relevant interest.

The relevant interest of a specified period is not taken into account in computing the relevant interest of a subsequent specified period.

(2K)(h) A claim for relief under this subsection must:

  • include a statement to the affect that the conditions of paragraph (f) are met, and
  • be submitted electronically in the manner provided for by the Revenue Commissioners.

(2K)(i) Where a residential property is let partially under a qualifying lease (which is a lease between a person chargeable and a qualifying tenant) and partially under another lease, the deduction for interest on borrowings under subsection (2)(e) is computed by apportioning the interest between the respective leases on a just and reasonable basis.

(2K)(j) The retention period for records and linking documents provided for in section 886 (which is concerned with the obligation on taxpayers to retain certain records) commences on the last day of the specified period in respect of which a claim is made under this subsection. As a claim will not be made earlier than year 4 after the beginning of a specified period, the retention period for records relating to the claim would, in the absence of this measure, be substantially reduced.

Miscellaneous

(4)(a) Where an amount for which a deduction is authorised by subsection (2) is payable in respect of more than one premises, the inspector is authorised to make such apportionments as are necessary to determine the appropriate amount of any deduction to be allowed in respect of any premises.

(4)(b) Where a part of a premises is retained for common use by persons occupying other parts of the premises, payments made for the use of a common area are treated as having been made in respect of those other parts of the premises.

Prohibition on double deduction

(5) A deduction is not allowed under this section if a deduction has already been allowed for the same amount in the computation of a person’s income for tax purposes.

Relevant Date: Finance Act 2020