On Tuesday 8 October 2019 the Minister for Finance, Pascal Donohoe, delivered his Budget 2020 speech. This included the announcement of some significant Irish property related tax changes, including:
- An increase in the rate of Stamp Duty on non-residential property from 6% to 7.5%. There is no change to the rate on residential property.
- Introduction of interest deductibility limitations for Irish Real Estate Funds (“IREFs”).
- Irish Real Estate Investment Trusts (“REITs”) will no longer be able to rebase their properties to current market value when exiting the REIT regime (unless established for at least 15 years) and DWT is to apply on distributions of gains.
These changes are effective from midnight 8 October 2019, rather than via the normal legislative process, in order to prevent an abuse of the provisions in the interim.
Stamp Duty on Non-Residential Property
The Minister announced an increase in the rate of Stamp Duty applicable on the acquisition of non-residential property (including commercial real estate) by 1.5% to 7.5%. There is to be no increase in the rate for residential property. This rate increase is with effect from midnight 8 October 2019.
Transition measures are to apply for transactions in progress. Where there is a binding contract in place for the acquisition of a property before 9 October, which is executed before 1 January 2020, the rate of Stamp Duty applicable should be 6%.
Existing provisions for a refund of Stamp Duty paid on land which is subsequently developed for residential purposes have been amended to take account of the higher Stamp Duty rate now applicable. The new 7.5% rate will still apply on the acquisition of the land, but the refund will bring the final cost back to 2% under the refund scheme.
The 7.5% Stamp Duty rate will also apply to acquisitions of shares deriving their value from Irish non-residential property acquired or developed with a view to realising a gain on disposal.
Irish Real Estate Funds (IREFs)
The Minister has introduced interest deductibility limitation for IREFs. Under previous legislation there was no limitation on the level of leveraging allowed for an IREF, and it was not unusual for IREFs (and indeed any property owning entity) to be highly geared through a combination of third party senior debt and shareholder loans.
The changes introduced provide that an IREF shall be treated as having taxable income, taxed as Case IV income at 20%, where:
(a) its debt exceeds 50% of the cost of its assets; and/or
(b) the ratio of property income to financing costs is less than 1.25:1.
Similar provisions are included where an IREF has incurred any expenses which are not wholly and exclusively for the purposes of the IREF business.
As IREFs are currently tax exempt at fund level, and only subject to withholding tax on profit distributions to certain investors. Therefore, the introduction of a direct tax charge for IREFs is a significant issue and will need to be factored into cashflow and investment returns. Manager, IREFs and investors should seek advice on the impact of these changes.
Furthermore, in his speech the Minister stated that he has been advised to intensely scrutinise activities in the IREF regime over the coming year with a view to taking further action if necessary. Therefore, this may not be the last of the changes to the IREF regime, and further changes may be expected.
Real Estate Investment Trusts (REITs)
The Minister introduced a number of changes to REITs “to ensure that an appropriate level of tax is paid on property gains by REITs”.
Prior to these changes, a deemed disposal and rebasing of property values was provided for on a company ceasing to be a REIT, thereby avoiding any latent capital gains tax exposure. Changes made ensure that this treatment is only available where the REIT has been in existence for at least 15 years. This change comes into effect from 9 October 2019.
Additionally, the distribution of proceeds from the disposal of a property by a REIT shall be subject to dividend withholding tax upon distribution.