Budget 2020 analysis on the changes for the property and construction sectors from KPMG's Jim Clery, Carmel Logan, Tim Lynch (pictured) and Gareth Bryan.

Stamp Duty

The minister has raised the rate of stamp duty on non-residential property from 6% to 7.5% with effect from 9 October 2019. This stamp duty increase effects commercial property, farm land and goodwill, as well as all other non-residential property.

There will be limited transitional arrangements which will apply the old 6% rate to instruments executed before 1 January 2020 on foot of a binding contract which existed prior to 9 October 2019.

The rebate scheme which exists for the refund of stamp duty in respect of land which is subsequently used for residential development remains in place and the conditions remain unchanged.

It has been confirmed that the effective rate will remain at 2% following a refund (i.e. a refund of 11/15 will apply to the 7.5% rate of stamp duty), although the conditions to meet this refund scheme are onerous and subject to completion within relatively tight time limits.

Help to buy

The help to buy scheme has been extended, unchanged, for a further two-year period to the end of 2021. This incentive provides a refund of 5% of the cost of a new house, subject to a maximum refund of €20,000, a maximum house price of €500,000 and a minimum LTV of 70%.

In Association with

The refund remains dependent upon the buyer having paid sufficient income taxes for prior years. The minister notes that 15,000 new home owners have availed of the scheme and we believe that the scheme has played a key role in restarting housing construction in Ireland.

Living City Initiative

Additionally, the Living City Initiative has been extended until the end of 2022. The Living City Initiative is a scheme of property tax incentives which applies to certain “special regeneration areas” in the centres of Dublin, Cork, Limerick, Galway, Waterford and Kilkenny. The scheme provides for tax relief for qualifying expenditure incurred on both residential and certain commercial refurbishment and conversion work.

REIT Regime

A number of changes have been introduced to amend the REIT regime to increase the level of tax being collected on property gains by REITs.

The first measure introduced requires a distribution or reinvestment of the proceeds of a disposal of a rental property. This measure applies 25% tax for the REIT where the proceeds are not reinvested or distributed to shareholders.

The new rules seem inappropriately harsh, as it appears to require full distribution or reinvestment of the entire proceeds of a sale and makes no allowance for the costs of disposal or repayment of bank debt. This is likely to require refinement.

In addition, where the proceeds are distributed, Irish dividend withholding tax (at the new rate of 25% with effect from 1 January 2020) will apply to such distributions, without the normal non-resident exemptions (subject to possible treaty relief).

The second measure amends the provisions for how a REIT would leave the REIT regime. It no longer permits a deemed disposal and re-acquisition, unless the REIT has been in existence for more than 15 years. Finally, the proposed increase in dividend withholding tax to 25% would also appear to impact on REIT investors with effect from 1 January 2020.

Other Changes

The Minister announced a further allocation of €2.5bn to the housing programme for 2020 which seeks to prioritise investment in the social housing programme.

IREF Anti-Avoidance Rules

The minister has announced the immediate introduction of new anti-avoidance measures designed to counteract perceived aggressive tax planning by some Irish Real Estate Investment Funds (IREFs).

Background to IREF regime

Finance Act 2016 introduced a 20% withholding tax applicable to return on investments made by certain investors in Irish regulated funds which hold Irish real estate investments (IREFs). A fund (or sub-fund of an umbrella fund) is considered to be an IREF where at least 25% of the market value of its assets is derived (directly or indirectly) from IREF assets.

For these purposes, IREF assets include Irish real estate, shares in an Irish REIT, shares in a company which derives all/most of its value from Irish real estate or a REIT, units in another IREF, and loans secured on and which derive their value (or greater part of their value) directly or indirectly from Irish property.

Whilst IREFs have not to date been taxable in their own right, they are responsible for operating withholding tax at a rate of 20% on the occurrence of certain taxable events for in-scope investors (certain categories of investor are exempt).

Anti-avoidance measures

In his budget speech, the minister acknowledged the important role that institutional investors play in terms of increasing supply, both of commercial and residential property and noted that this type of investment is welcome at a time when increasing supply to meet housing challenges is of the utmost importance.

He noted, however, that it is essential that an appropriate level of tax is paid by such investors. In this regard, the minister highlighted that the Revenue Commissioners had identified aggressive tax avoidance behaviour by certain IREFs as part of their review of the first financial statements filed by IREFs earlier this year.

As a result, the minister has indicated that a number of anti-avoidance measures are being introduced to address the potential issues identified.

Deemed interest income

The financial resolutions include provisions introducing two new rules aimed at disincentivising the use of debt by IREFs to reduce the level of profits which would otherwise be subject to withholding tax. Although the minister referred to the changes as limitations on interest expenses, in reality the rules seek to impose a cash tax liability on amounts equivalent to excessive interest expenses paid by IREFs.

The first of these rules will apply where the total property financing costs (i.e. any debt borrowed by an IREF) exceeds an amount equal to 50% of the cost of the IREF assets. The second rule targets a scenario where the ratio of an IREF’s combined profits and debt relative to debt falls below 1.25:1 (which would be the case where the level of interest payable on debt significantly reduces the level of profits).

Where either of the measures apply, the IREF will be taxed at 20% on an amount of deemed interest income, which cannot be sheltered by losses or allowances of any kind. The level of deemed interest income which is taxable depends on specific calculation methodology prescribed by each measure, but in each case is focused on counterbalancing the ability of an IREF to reduce its profits by way of debt funding. Although these two measures apply independently of one another, there are provisions to ensure double taxation does not arise where both apply.

These measures, in addition to those noted below, are to apply to accounting periods commencing on or after 9 October 2019 (though where an accounting straddles this date, it is required to be split into two parts, with the latter part subject to the new rules).

Other Measures

Another measure included in the financial resolutions seeks to deal with any expenses or disbursements made by an IREF (and taken into account in computing its profits) which were not wholly and exclusively laid out or expended for the purposes of the IREF business. Under this new rule, the IREF would be subject to tax (at a rate of 20%) on an equivalent amount.

The financial resolutions also contain a number of additional amendments which are aimed at counteracting schemes to reduce the amount which is subject to withholding tax where units in the IREF are redeemed or cancelled.

The Budget 2020 Tax Policy Changes document which was released indicates that anti-avoidance provisions in the securitisation “Section 110” regime will be amended as part of Finance Bill 2019 to ensure that they operate as intended.

• Click here to view detailed Budget 2020 sectoral analysis from KPMG experts