Revenue Note for Guidance

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Revenue Note for Guidance

372AP Relief for lessors

Summary

This section provides relief to lessors in respect of eligible expenditure incurred in a qualifying period in relation to a house which is a special qualifying premises (i.e. Countrywide Refurbishment Scheme) or a qualifying premises (i.e. all other schemes). The relief takes the form of a deduction which may be set off against rental income from the premises in computing liability to tax in respect of such income. Under the rules governing the taxation of rental income the relief is, in effect, available against all rental income arising in the State, whether it arises from the premises in question or from other lettings.

Provision is made for the apportionment of eligible expenditure and of relevant cost (see definition in subsection (1)) where a premises is part of a building or of a development.

Provision is also made for a clawback of relief granted if during the relevant period of 10 years a premises ceases to be let or otherwise ceases to be a qualifying premises or a special qualifying premises (for example, by being extended beyond the space limitations provided). A clawback also applies if a premises is sold by the lessor or passes by way of gift, inheritance, etc. during this 10 year period but in such cases the relief may be passed on to the successor or purchaser where the premises does not cease to be a qualifying premises or a special qualifying premises. Provision is included to ensure that the transfer of property to be held in trust for the benefit of creditors under any of the arrangements provided for under the Personal Insolvency Act 2012 will not, of itself, trigger a clawback of relief.

Expenditure in relation to the cost of a site is excluded from relief as is the appropriate portion of the cost of an existing building in which a house is comprised where conversion or refurbishment expenditure is involved. Special rules apply in the case of a house which is sold by a builder before being used (or within a period of one year of being used in the case of the Student Accommodation Scheme) and before a deduction has been allowed in respect of it.

Section 372AS contains provisions which supplement this section.

Details

Definitions

(1)chargeable period” means an accounting period of a company or a year of assessment.

relevant cost”, in relation to a house, means, subject to the apportionment provisions in subsection (6), the aggregate of —

  • in the case of construction of the house, the cost of the site of the house, or in the case of conversion or refurbishment, the cost of the site of the house and of any building in which the house is comprised, and
  • the expenditure actually incurred on the construction of, conversion into, or refurbishment of the house.

relevant period”, in relation to eligible expenditure on a qualifying premises or a special qualifying premises, means —

  • in the case of the construction of, or conversion of a building into, a qualifying premises, the period of 10 years beginning on the date of the first letting of the qualifying premises under a qualifying lease, and
  • in the case of the refurbishment of a qualifying premises or a special qualifying premises, the period of 10 years beginning on the date of the completion of the refurbishment. Where the premises was not let under a qualifying lease on that date, the 10-year period begins on the date of first letting after completion.

relevant price paid” means the amount which bears to the net price of a house the same proportion as the amount of the eligible expenditure actually incurred, which is to be treated under section 372AS(1) as having been incurred in the qualifying period, bears to the relevant cost in relation to that house.

The relief

(2) Provision is made, subject to subsections (3), (4) and (5), that, in computing the profit rent from a qualifying premises or a special qualifying premises, a person is entitled to deduct so much of the eligible expenditure on the premises which is treated as having been incurred in the qualifying period. The deduction is given by treating the expenditure as an allowable deduction in calculating a surplus or deficiency on the rental income from the premises.

Under the rules governing the taxation of rental income, where the deficiencies exceed the surpluses in computing units of rental income, a taxpayer may claim to have any excess set off against other rental income of the taxpayer of the same year and any overall excess carried forward for set-off against the taxpayer’s rental income for any subsequent year. In effect, therefore, the relief given is available for offset against all rental income and not just income from the particular premises.

(3)(a) In the case of the refurbishment of a special qualifying premises the deduction to be given by virtue of subsection (2) is a deduction of 15 per cent of the eligible expenditure for:

  • the chargeable period in which the expenditure is incurred or, if the premises was not let under a qualifying lease during that period, the chargeable period in which the premises is first let after the expenditure is incurred, and
  • any subsequent chargeable period in which that premises continues to be a special qualifying premises.

(3)(b) The aggregate amount to be so deducted cannot exceed 100 per cent of the expenditure involved, and where a chargeable period is less than one year, the amount of the deduction is proportionately reduced.

Impact of a premium on the amount of relief

(4) Under section 372AO, if a premium payable on the lease of a house exceeds 10 per cent of the “relevant cost” of the house in the case of construction, or 10 per cent of the market value of the house at the time of completion of works in the case of conversion or refurbishment, the lease is not to be a qualifying lease and, accordingly, no relief is due under this section. Where a premium does not exceed this 10 per cent limit, then, if all or any part of the premium is not taxed as rent, all or the appropriate proportion of the premium is to be subtracted from the amount of the eligible expenditure allowable as a deduction under subsection (2).

[Where a premium is required under a lease the duration of which does not exceed 50 years, section 98 provides that a proportion of the premium is to be treated as rent. The proportion to be so treated is 100 per cent where the term of the lease does not exceed 1 year, 98 per cent where the lease is for 2 years, 96 per cent where the lease is for 3 years, and so on.]

Where only part of the eligible expenditure is treated as incurred in the qualifying period, an appropriate proportion of the premium is subtracted. This is the same proportion as the amount of the eligible expenditure, which is treated as incurred in the qualifying period, bears to the whole of the eligible expenditure incurred.

Example

Site cost

€30,000

Construction expenditure (all in qualifying period)

€90,000

Relevant cost

€120,000

Premium must not exceed 10% i.e. not more than

€12,000

Annual rent of qualifying premises

€7,500

Premium (lease less than 50 years), say

€6,000

Amount of premium treated as rent for income tax, say

€2,000

Relief under section 372AP

Construction cost

€90,000

Less non-rent portion of premium

€4,000

Net Relief

€86,000

Limit on deductible expenditure at a park and ride facility

(5) There is a limit on the amount of eligible expenditure incurred on qualifying premises at a park and ride facility which is to qualify for a deduction under this section. Thus, a deduction will only be made provided that all eligible expenditure under the section when aggregated with qualifying expenditure, if any, on owner-occupied accommodation under section 372AR at the park and ride facility, does not exceed 25 per cent of total allowable or deductible expenditure at that facility. The onus to certify compliance with this requirement is placed on the relevant local authority.

Apportionment

(6) Subsection (6) provides for the apportionment of eligible expenditure and relevant cost of a building or buildings where a qualifying premises or a special qualifying premises forms a part of a building or of a development, in order to determine the amounts related to the individual premises.

Clawback of relief

(7) There is a clawback of relief where a house ceases to be a qualifying premises or a special qualifying premises during the 10-year relevant period (e.g. it is used as the residence of the lessor). A clawback also applies where the lessor’s interest in the house passes (e.g. by way of sale or gift) to any other person but the house does not cease to be a qualifying premises or a special qualifying premises. The clawback deems the lessor to have received rent from the premises equal to an amount expressed by the formula—

A – B

Where A is the amount of relief originally given, and B is the amount of unused section 23-type relief, which has been carried forward under section 384 into that tax year. It is the net figure, rather than the gross figure, which is to be taken into account as deemed income. This is important because for the purposes of both the high earners restriction and the application of Universal Social Charge (USC) the amount of deemed income is treated as part of income.

In order to ensure the person does not receive “double” relief, the amount of the deficiency which has been carried forward into that year is reduced by an amount represented by B in the above formula.

Example

Allowable construction expenditure

€100,000

Net Rent per annum

€10,000

Year 1

Rent

€10,000

Relief

€100,000

Deficiency c/forward

€90,000

Year 2

Rent

€10,000

Deficiency forward

€90,000

Deficiency c/forward

€80,000

Year 3 (lessor sells house midway through the year)

Rent

€5,000

Rent deemed received (€100,000 – €80,000)

€20,000

Total

€25,000

Case V assessment

€25,000

Circumstances in which clawback of relief will not arise

(7A) The transfer of a “qualifying premises” or a “special qualifying premises” to be held in trust for the benefit of creditors under a Debt Settlement Arrangement or a Personal Insolvency Arrangement, in accordance with section 66(2)(c) or section 100(2)(c) respectively, of the Personal Insolvency Act 2012, shall not trigger a clawback of relief under this section.

Successors in title to a qualifying premises or a special qualifying premises

(8) Where a person succeeds, within the 10-year relevant period, to the lessor’s interest in a qualifying premises or a special qualifying premises, then that person is treated as having incurred the same amount of eligible expenditure as the lessor was treated as having incurred in the qualifying period. (This provision ignores any reduction made to the lessor’s expenditure under subsection (4)(b) in relation to premiums). However, where a purchase is involved the amount treated as having been incurred by the purchaser may not exceed the relevant price paid.

Example

A house cost €120,000 to build of which €100,000 was incurred on its construction in the qualifying period and qualified for relief. The site cost was €30,000. The “relevant cost” of the house is therefore €150,000. The house is sold by the original lessor for €160,000 (and the relief of €100,000 already granted is clawed back). The “relevant price paid” is:

€160,000 ×

€100,000


= €106,667

€150,000

As this amount is greater than the expenditure of €100,000 incurred by the original lessor in the qualifying period, then the purchaser is deemed to have incurred €100,000. If, however, the house were sold for €140,000, the “relevant price paid” would be:

€140,000 ×

€100,000


= €93,333

€150,000

As this amount is less than the expenditure of €100,000 incurred by the original lessor in the qualifying period, then the purchaser is deemed to have incurred €93,333.

House sold before being used

(9) Provision is made, subject to subsection (10) (which deals with the sale of a house by a builder in the course of a trade), that where a newly constructed house is sold before it used, or a newly converted or refurbished house is sold before it is used subsequent to the incurring of the expenditure involved, then the purchaser is treated as having incurred eligible expenditure in the qualifying period on the house equal to the lower of the amount of the expenditure which is treated under section 372AS(1) as having been incurred in the qualifying period and the relevant price paid. Where the house is sold more than once this provision applies only in relation to the last of those sales.

Sale of a house by a builder in the course of a trade

(10) This provision deals with situations where eligible expenditure is incurred in relation to a house by a builder who carries on a trade which consists of the construction, conversion or refurbishment of buildings with a view to their sale. Where the house is sold in the course of that trade:

  • before the house is used, in the case of construction, and
  • before the house is used subsequent to the incurring of expenditure, in the case of conversion or refurbishment,

then the purchaser is treated as having incurred eligible expenditure on the house in the qualifying period equal to the relevant price paid by the purchaser (i.e. the first purchase).

Example

A house cost €120,000 to build and all this expenditure is incurred in the qualifying period. The cost of the site was €30,000 making the “relevant cost” €150,000. The builder sells the house unused for €180,000 to a person who will let it as a qualifying premises. The “relevant price paid” on which the purchaser’s relief will be based is:

€120,000

€180,000

×


= €144,000

€150,000

In effect, relief is given for the appropriate proportion of the builder’s profit attributable to the expenditure on construction.

Sale of a house in a qualifying student accommodation area by a builder

(10)(a)(ii) and (b)(ii) This provision applies, in the case of a house under the Student Accommodation Scheme, which is sold on or after 5 December 2001, where the house is sold within one year after it is used, or within one year after it is used subsequent to the conversion or refurbishment expenditure being incurred. This caters for situations where a builder lets a house under a qualifying lease to students at the commencement of an academic year while awaiting sale of the house. In such situations, if the sale takes place within a year of first use, the purchaser is entitled to relief on an amount which includes an appropriate proportion of the builder’s profit.

Subsequent sale of a house which was built and sold unused by a builder

(10)(II) If there is any subsequent sale of a house, which was built and sold unused by a builder, before it is used, then relief in respect of the later purchase is granted under subsection (9). However many times such a house is subsequently resold unused, the relief under subsection (9) (which is confined to the final purchaser) is limited to the lower of the relevant price paid on the first purchase and the relevant price paid on the final purchase.

Example

The house mentioned in the last example (which cost €150,000 for its construction and site) which was first sold for €180,000 was subsequently sold unused for €190,000 and later sold unused for €200,000. The final purchaser’s relief is limited to the “relevant price paid” on the first purchase (that is, €144,000) because this is lower than the relevant price related to the final purchase. The “relevant price paid” in relation to the final purchase is:

€120,000

€200,000

×


= €160,000

€150,000

However, if the same house which was first sold for €180,000 was subsequently sold unused for €170,000, the relief would be €136,000 as this is lower than the “relevant price paid” on the first purchase (€144,000). This relevant price in relation to the final purchase is calculated as follows:

€120,000

€170,000

×


= €136,000

€150,000

Provision against double claims

(11) Expenditure which qualifies for relief under this section may not include expenditure in respect of which any person is entitled to a deduction, relief or allowance under any other provision of the Tax Acts.

Grants to be deducted from amount of expenditure

(12) Expenditure is not regarded as incurred by a person in so far as it has been or is to be met, directly or indirectly, by the State or by any board established by statute or by any public or local authority.

Interaction of relief with Capital gains tax

(13) Section 555 applies as if a deduction under this section were a capital allowance and as if any rent deemed to have been received by a person under this section were a balancing charge. Thus, where relief (which has not been clawed back) is granted to a lessor who subsequently disposes of the house involved, the lessor will not be denied a deduction for Capital Gains Tax purposes unless it is necessary to take the relief into account to reduce a loss for those purposes.

In the following examples, which illustrate the operation of this provision, capital gains tax indexation relief is ignored for the sake of simplicity.

Example 1

A person sells a house for €200,000 after the end of the 10-year relevant period. He bought the house for €120,000 and he received relief under section 372AP of €96,000. There is no clawback of relief. Under this subsection the gain for capital gains tax purposes is computed as follows:

Sale price

€200,000

Cost*

€120,000

Gain

€80,000

* The cost will not be reduced because of the €96,000 relieved under section 372AP.

Example 2

A person sells a house for €200,000 within the 10-year relevant period. She bought the house for €220,000 and she received relief under section 372AP of €155,000. The disposal resulted in a clawback of the relief of €155,000. The loss for capital gains tax is computed as follows:

Sale price

€200,000

Cost*

€220,000

Deduct amount relieved under section 372AP

€155,000

Add clawback (treated as a balancing charge)

€155,000

€220,000

Loss

€20,000

The relief given in this case for income tax under section 372AP will not affect the capital gains tax position.

(13A) Where an event, referred to in paragraph (a) or (b) of subsection (7), which gives rise to a clawback of section 23 relief, occurs on or after 1 January 2012, section 555 applies as if a deduction under this section were a capital allowance and as if the amount represented by ‘A’ in the formula in subsection (7) were a balancing charge. Thus, where a clawback occurs and is calculated under the provisions of subsection (7), (as amended by Finance Act 2012), a Capital Gains Tax loss arising on a disposal of such a property will not be restricted as a consequence of that amendment. Where there is no clawback of section 23 relief or the clawback occurred prior to 1 January 2012, the provisions of subsection (13) apply.

Need for planning permission

(14) Provision is made that this section will not apply in the case of any conversion or refurbishment unless planning permission, in so far as it is required, has been granted under the Local Government (Planning and Development) Acts 1963 to 1999 or the Planning and Development Act 2000.

Miscellaneous

(15) The provisions of section 372AS supplement this section.

Relevant Date: Finance Act 2020