Tax Alert
Taxation & Property May 2011
Introduction
Due to the unprecedented growth in property values in recent
years, many taxpayers invested in property. These investments
might have included a rented residential or commercial property,
a holiday home, a Section 23 property, or a foreign property.
In the good times, (which have suddenly disappeared), many
Investors were frequently unaware of the more intricate
and numerous tax issues, associated with property investments.
This was largely explained by the comfort, arising from
considerable growth in property values and consequently,
substantial additional wealth generated, by participating
in such investments. Any adverse tax consequences were frequently
overlooked and deemed immaterial as the sale of such properties
usually generated substantial profits. In addition, substantial
additional funding was readily available to deal with any
unexpected costs or liabilities. Sadly, all the positive
attributes associated with such investments have now disappeared.
In the current economic climate, investors will have to
be proactive and manage their property portfolios more tax
efficiently.
Finance Act 2011
The 2011 Finance Act includes an effective deferral into recent
years of the curtailment of tax reliefs on S23 properties.
The charges will go ahead but only after an assessment of
their impact.
Foreign
Properties:
Irish owners of foreign properties may be subject to Income
tax and capital gains tax on profits/gains arising, both
on Irish and also foreign investment properties. If an individual
is “domiciled and resident” in Ireland, they are taxable
on their “worldwide income and gains”. Under most Double
Taxation Agreements, offsets will be available if foreign
tax is paid, thereby ensuring that double taxation, doesn't
arise, or is minimised.
Up to recently, capital losses on property disposals were
not an issue, as such losses rarely arose. There is a legal
obligation on taxpayers to file details of property disposals,
triggering both gains and losses for tax purposes, in their
tax returns.
Tax Minimisation:
In the current climate certain steps should be taken to minimise
taxes including: 1.
When purchasing a property initially,
the question that frequently arises is whether the property
should be purchased personally or through a company. My
preference is usually to purchase personally, to avoid double
capital gains tax exposure on corporate ownership.
2.
Interest on borrowings to purchase rental
properties was fully tax relieved at ones marginal tax rate
(the top rate is currently 41%) The 2009 Finance Act restricted
relief to 75% of the interest charge. It is advisable from
a tax perspective, to borrow as much as possible, to purchase
a property, assuming it is commercially viable to do so.
Surplus cash might be used for alternative purposes.
3.
Renovation of properties needs careful
planning to maximise the reliefs available. Pre-letting
expenses are usually not tax deductible. In addition, expenditure
on improvements as apposed to repairs, won’t qualify for
tax deduction. Improvement costs, are regarded as part of
the cost of the property and would be factored in when calculating
capital gains tax, on an ultimate sale. In summary, in any
renovation, repair or fit out project, advance planning,
can frequently generate substantial tax savings. 4.
Owners of rented residential properties
are legally obliged to register with the Private Residential
Tenancy Board (PRTB). Failure to do so can result in penalties
and summons. In addition, from a tax perspective, if the
property owner hasn’t registered their interest in the property,
interest on the mortgage to finance the property, won’t
be tax deductible. In addition, it is necessary to register
with the PRTB, every time a new tenant is signed up. In
summary, failure to comply with these regulations can result
in substantial additional unnecessary taxes arising for
the unwary. 5.
In the case of married couples the ownership
of the property should be reviewed. Under individualisation
rules, each spouse can have income of €23,800 (for 2011)
and only be taxed at the standard rate, of 20%. Consequently
property ownership might be reviewed. Transferring properties
between spouses doesn’t have adverse tax costs, from an
Income Tax, Capital Acquisitions and Capital Gains Tax perspective.
Stamp duty will however arise.
6. Taxpayer’s should operate a separate bank
account for rental activities, to improve efficiencies from
an administrative perspective.
7.
Frequently Taxpayers invest in the properties,
which attract tax allowances, including capital allowances.
Examples might include Section 23 properties, nursing homes,
hotels and creches. Because a premium is usually charged
for these properties it is important that an accurate cost
analysis is undertaken to determine the likely return on
the investment. 
Capital Gains Tax which is payable on profits on asset disposals
is now 25%.
·
The exemption for ones principal
private residence. ·
Retirement relief can be claimed
in respect of gains arising on the disposal of certain “Qualifying
Business Assets”, if the individual is over 55 years, provided
all the other specified conditions are satisfied.
·
Indexation should be claimed
which increases the cost. Indexation does not apply to assets
acquired in 2004 and later years. ·
The annual exemption threshold
of €1,270 per spouse should be used. Bed and Breakfast transactions
might be undertaken each year. The procedure is to sell
and immediately repurchase shares, to utilise the annual
exemption threshold, which would otherwise be lost. ·
The timing of disposals is
important to ensure that any losses are used at the earliest
opportunity.
·
Whilst capital losses can
be used to shelter gains arising in the year and in future
years, capital losses cannot be carried back to prior years.
Bearing this in mind, if one is anticipating asset disposals,
which might trigger both losses and gains, the timing of
the disposals is important to ensure that the gains can
be sheltered either by current year losses or losses forward.
·
It is important for “non-domiciled
individuals” i.e. (Foreigners) to avail of the “remittance
basis” of assessment for payment of income tax and capital
gains tax. Usually individuals who are “Irish resident but
non-domiciled”, are liable to income tax and capital gains
tax on income and gains arising in Ireland and the U.K,
and also income and gains arising on other foreign assets,
but only to the extent that the proceeds from the sale of
the foreign assets (excluding U.K assets), are remitted
to Ireland. The recent Finance Act has introduced changes
to this remittance basis for U.K assets when calculating
Capital Gains Tax.
·
Negligible value claims can
also be made before the tax year expires (i.e. 31.12.2011)
where asset values are deemed negligible (i.e. it is not
necessary in all instances to actually sell assets to crystallise
a loss.
·
The government recently decided
to make further changes to the payment dates for capital
gains tax purposes, to improve cash flow. Under the current
legislation, capital gains tax arising on disposals during
the period 01st January 2009 to 30th November 2009 must
be paid by the 15th December 2009. Tax on gains made during
the period 01st December 2009 to 31st December 2009, must
be paid by the 31st January 2010.
New Property Taxes
& Revenue Audits
The NPPR Charge
The Local Government (Charges) Act 2009 introduces a
€200 annual charge on non principal private residences,
payable by the owners to the local authority in whose area
the property concerned is located.
2011 Charge
Collection of the Non Principal Private Residence Charge
for 2011 will commence on the 31st March 2011. The 2011
charge is based upon the ownership and status of the property
on the 31st March 2011. Please note that you must pay the
NPPR charge for 2011 on or before the 30th June to avoid
late payment fees. Further details available onf www.nppr.ie.
In recent times the Revenue Commissioners have focused on
different sectors from a Revenue Audit perspective. The
Revenue have dealt with non-residents deposits, off-shore
funds, insurance products and are now focusing on rental
activities.
The Revenue Commissioners have powers to investigate the tax
compliance of the Country’s 120,000 landlords. Legislation
is being drafted to give the Revenue full access to the
database of the Private Residential Tenancies Board (PRTB),
which contains the names, addresses, PPS details and property
interests of all registered landlords in the Country.
Since
the Revenue have access to the PRTB database, they plan to
cross- check details in the database with declared rental
income. The move is expected to lead to an escalation in
the number of Revenue audits, tax penalties and settlements.
Conclusion
In conclusion despite the substantial reduction in property
and share values, and the associated negative equity, proactive
management from both a commercial and taxation perspective,
is required to maximise the return from such investments.
Andrew Guerin CPA AITI
Andrew Guerin & Associates,
Taxation & Financial Advisers,
19 White Street,
Georges Quay,
Cork.
| Phone: 021-4840721
Fax:021-4840726 Email: info@aguerin.ie/www.aguerin.ie
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Caveat:
This brochure is only a summary of relevant tax issues and
is not intended to be a comprehensive guide. Professional
advice should be sought before taking any action.
© Copyright Andrew Guerin & Associates
2011
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