How property investors are set to save more than €500m in tax

Property investors look set to save more than €500 million in tax thanks to an incentive introduced during the dark days of the financial crisis.

The capital gains tax (CGT) exemption, introduced back in 2011 to stimulate a then-struggling property market, allowed investors buying commercial or residential property to avoid taxes on any gains they made on the property, provided that they held the property for seven years (later reduced to four).

The incentive ran until 2014, and now figures from Revenue, released for 2018 and 2019, show that the cost to the exchequer for these years was almost €300 million, as investors avoided tax on gains of almost €1 billion. With figures yet to be disclosed for the remaining two years, 2020 and 2021, it’s likely that the total tax savings will exceed half a billion euro.

The success of the scheme is likely to be one of the reasons why so many smaller landlords have departed the residential property market in recent years, as an eligible property would have had to be sold by year-end 2021 to qualify for the relief.

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Latest figures from the Residential Tenancies Board show that about 46 landlords left the market each week in the autumn, or about 2,000 on an annual basis.

The incentive (also known as Section 604A Relief) was introduced in 2011 to stimulate activity in the then beleaguered commercial and residential property markets, and was available to both individuals and companies.

At the time, property prices had plunged from the highs of 2007-2008 and there was an oversupply of property, with so-called ghost estates abounding and a lack of demand and investment in a time of austerity.

Launching the scheme, then minister for finance Michael Noonan said he hoped the measure would "restore some confidence" and "renew activity" in the construction, development and property sectors, by attracting investors.

“I want them to come in, buy, invest and stay for at least seven years,” he said.

The incentive has proved to be particularly fruitful for landlords, given the sharp increase in prices between then and now

Recalling that "you couldn't sell anything in 2011", Jim Clery, tax partner with KPMG, says that the relief encouraged investors to "be brave" at a time when no one was buying anything.

“It was a very important relief that was put on the books back in 2011,” he says. “Without it, we arguably wouldn’t have gotten ourselves out of the property crisis we were in.”

Originally, the scheme was due to end in 2013 but was subsequently extended to the end of 2014. The incentive meant that a landlord acquiring a property between 2011 and 2014 could avoid any CGT, levied at a rate of 33 per cent on the gain, that would otherwise apply.

The only restriction that applied was that the property had to be held for seven years (subsequently reduced to four from January 1st, 2018). This means that it is no longer possible to claim the full exemption, as this ran out as of December just gone. However, it is still possible to claim partial relief on properties held for longer than seven years. According to Revenue, if you owned the land or buildings for 10 years for example, the gain will be reduced by seven 10ths.

The incentive has proved to be particularly fruitful for landlords, given the sharp increase in prices between then and now.

In 2012 for example, the average price of a home in Ireland was just €205,476, according to figures from the Central Statistics Office – by October 2021 this had increased to €320,562, an increase of some 56 per cent.

And in Dublin, the increase has been even greater.

In 2012, for example, the average price in Dún Laoghaire-Rathdown stood at €408,116; but by October 2021 this had soared to €682,459, an increase of some 67 per cent. In Dublin city, meanwhile, the 2012 average price of €276,914 had rocketed to €489,202 by 2021, an increase of some 76 per cent.

And for canny investors who bought at the right time, all of these gains are free of tax. Indeed, figures from Revenue show that in both 2018 and 2019 (figures for 2020-2021 are not yet available), claims were made by 1,522 taxpayers for the exemption; of these, the vast majority, at 1,361, came from individual investors filing Form 11 tax returns, with 161 claims by companies.

Gain totals

The total amount of gains claimed by taxpayers in these years was €879 million, and the amount of tax which was avoided was €290 million (ie at a rate of 33 per cent).

While the scale of the relief may be significant, Clery notes that it shouldn’t really be seen as a cost to the exchequer, because without it “the transaction wouldn’t have happened”.

Almost half of the tax relief was claimed by individual taxpayers.

And there were some significant savings.

On average, the tax saving per claim/taxpayer in 2019 was €198,876, but when looked at on a granular basis, some taxpayers made considerably greater savings.

The data from Revenue shows that in 2019, for example, 169 taxpayers declared a capital gain of between €1 and €20,000 for a total gain of €1 million, with an exchequer cost of about €300,000. This means that each claimant made a tax saving of just €1,775 on average each.

But the greatest number of claimants that year, at 171, was those declaring gains of €100,000-€200,000. This means that each of these claimants saved some €47,368 in tax due to the exemption.

For Clery, the general tax burden for smaller landlords is acting as a disincentive for smaller investors to keep participating in the housing market

And some saved even more than that; those declaring gains of €500,000-€1 million saved €9.7 million in tax in total, or, on average, €220,454 each. Or what about the 68 taxpayers who declared gains on property eligible for the relief in excess of €1 million? They made total gains of some €422.4 million, and subsequently saved an average of €2 million in tax each due to the exemption.

The figures also show that most of the claims related to residential investment, with residential properties accounting for 61 per cent of all claims in 2019, followed by commercial (20 per cent) other (15 per cent); agricultural land/buildings (3.5 per cent) and development land (2 per cent).

However, the greatest tax savings were those made by commercial investors. Figures for 2019 show that the 140 commercial property investors claiming the relief made gains of some €245.8 million on property acquired during the years 2011-2014. And by avoiding CGT, they managed to save some €81.1 million in taxes.

Residential investors, on the other hand, made gains of some €88.4 million on property they acquired during the relevant time period, leading to tax savings of some €29.2 million that year.

Institutional investors

Of course, the CGT exemption enjoyed by smaller landlords and investors over this time period is something larger funds and institutional investors, which have come to dominate the build-to-rent market, have enjoyed for some time now.

Real-estate investment trusts, such as Ireland’s largest private landlord, Ires Reit, as well as funds structured as Irish real-estate funds (Irefs) such as those operated by US investor Kennedy Wilson and Davy, enjoy a number of tax benefits.

Indeed, depending on the timing of distributions and the various exemptions that apply, larger investors such as these can avoid stamp duty, CGT and corporation tax – and these tax savings are not subject to a specific time period as was the case for the aforementioned CGT exemption.

For Clery, the general tax burden for smaller landlords is acting as a disincentive for smaller investors to keep participating in the housing market.

As such, he would like to see professional landlords, for example those with in excess of 10 residential units, taxed as trades rather than as passive income generators.