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Residential land tax will unjustly penalise many landowners while pushing up the price of housing

Landowners who want to build but are trapped in the hopelessly slow planning process must still pay the tax, an expense they may have to pass on to homebuyers

Scaffolding on a residential construction site in the Sandyford district of Dublin, Ireland, on Monday, May 10, 2021. The mass purchase of affordable houses — on the market for about 400,000 euros ($490,000) — set off a public firestorm and highlights the growing tension over the squeeze in urban housing and the role of large investors. Photographer: Paulo Nunes dos Santos/Bloomberg

A residential construction site in Sandyford, Dublin. A new vacant site tax will penalise landowners whether or not they are trying to build. Photograph: Paulo Nunes dos Santos/Bloomberg

Keith Lowe
Mon Dec 5 2022 - 05:00

Our housing and property market is in deep difficulty, with the Central Bank of Ireland estimating 34,000 new homes a year over the next decade must be built to keep up with demand.

The Government’s number one policy priority under “Housing for All” was to maximise new housing output. It recently introduced a new Residential Zoned Land Tax (RZLT) with the goal of activating vacant land for residential purposes as a part of a pathway to increasing housing supply.

While the new tax aims to incentivise landowners to develop housing on zoned lands, if implemented in its current form it has the potential to have the opposite effect by further increasing development costs that, in turn, may increase house prices.

The RZLT is an annual tax calculated at 3 per cent of the market value of land within its scope. It applies to land that, on or after January 1st 2022, was zoned as being suitable for residential development and was serviced. The tax is payable each year in respect of the land, unless a deferral applies or the land ceases to be liable to the tax. The RZLT is not an allowable tax expense, so the true cost is substantially more. There are a number of exclusions from the tax, including sites which are subject to the Derelict Sites Levy and land used for certain infrastructure.

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If a site is worth €10,000,000, the tax each year would be €300,000. Assuming it takes three years to obtain planning permission and start building, then the tax would be a very sizeable €900,000

Earlier this month, each local authority prepared and published maps identifying lands within the scope of the tax. Under the legislation, any properties highlighted will all be subject to the 3 per cent tax unless the landowner makes a submission outlining the reasons why their lands should be excluded. This appeal must be lodged with the local authority by January 1st, 2023, providing a narrow appeal window, particularly given that most parties will need a planning consultant to assist them.

The deep problems in our planning system will further limit the effectiveness of the RZLT in stimulating housing output and ultimately increase the cost of development. Nearly every planning permission is currently being objected to, substantially extending the application time period for new developments. It seems unjust that if a landowner or home builder is using their best endeavours to obtain permission for a housing development, they will be penalised by having to pay the RZLT throughout the slow planning process.

If a site is worth €10,000,000, the tax each year would be €300,000. Assuming it takes three years to obtain planning permission and start building, then the tax would be a very sizeable €900,000, which will essentially be an additional cost of construction and in some cases could affect viability. Landowners will have no option to pay this tax for an extended period of years, increasing the cost of building and ultimately increasing prices for young homebuyers.

The legislation as it is currently stands would also penalise builders who are developing larger sites, as it is designed to tax those parts of the sites that do not have planning permission or are yet to commence construction. On very large sites, builders tend only to obtain permission for portions of the land rather than the entire development, and in many cases the lands are phased by the local authorities, allowing limited numbers of units to be granted permission during different time periods. Landowners will now have to pay tax on the balance of their lands without permission, again adding to costs.

No longer viable

There are many home builders who have secured planning permissions at great cost but given the passage of time between site acquisition and securing permission the project is no longer viable, due to inflation in construction costs. It seems unfair to impose a tax on these sites simply because they cannot secure funding to deliver the housing that was planned in good faith.

Legislation should be altered to exempt any landowner from the tax who has lodged planning permission or is subject to a local area plan for a site

Finally, the new tax is aimed at land that is zoned residential or of mixed use that is currently idle, regardless of its planning status. Property currently in use is exempt from this tax, but farmland that is zoned and has access to services is not. Farmers with zoned residential land will have the option of applying to have the land dezoned as part of this process or face the prospect of being levied at 3 per cent per annum on the value of their land from 2024.

It is my firm belief that the Government needs to review the workings of the tax to ensure it is both effective and equitable. Legislation should be altered to exempt any landowner from the tax who has lodged planning permission or is subject to a local area plan for a site, on the basis that they start construction within a reasonable period of time following the final granting of permission. The initial date of appeal should also be extended further than January 1st, 2023, and any site undergoing phased development should be exempt.

Ultimately, the RZLT in its current form has the potential to undermine many projects and increase the cost of house building at a time when actual build costs are already escalating due to inflation and in a period of rising interest rates. If Government wants to deliver on its Housing for All targets, the focus has to be on fixing our planning system and improving viability, ensuring young home buyers can afford their new home.

Keith Lowe is chief executive of DNG Group.

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