What does Budget 2020 mean for property?

08 October, 2019

  • Budget 2020 sees an increase in the rate of commercial stamp duty from 6% to 7.5% in respect of transfer documents executed after midnight tonight, 8 October 2019 (but with transitional measures where a binding contract has been entered into on or before 8 October). This new 7.5% rate will not only apply to transfers of land and commercial property, but also to contracts for the sale of other types of assets, such as debtors, goodwill or the benefit of contracts, and to certain lease premiums. The Minister has also announced an extension of the stamp duty charge on share transfers to "cancellation" schemes of arrangement carried out under Part IX of the Companies Act, 2014. 
  • First-time buyers will welcome the extension of the "Help to Buy" scheme beyond 31 December 2019 to 31 December 2021 in their pursuit of home ownership. 
  • Welcome urban regeneration measures include the extension of the Living City initiative to 2022 and the dedication of €130m towards urban regeneration.
  • Budget 2020 underlines the Government's commitment to providing housing supply with the pledging of €2.5 billion of funding to the Housing Programme.
  • Budget 2020 announces a number of changes to the Irish Real Estate Fund regime and Real Estate Investment Trust regime. The measures, which will have effect from midnight tonight, have been introduced to ensure that 'an appropriate level of tax is paid' and that any perceived avoidance is effectively combatted. Targeted measures to prevent avoidance are always welcomed but more general changes to a regime that has been subject to significant change in recent years could negatively impact investor sentiment.
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Minister Donohoe noted the importance of the role of institutional investors in terms of increasing supply of Irish commercial and residential property but also noted that it is essential that appropriate tax was paid on such investments. With that in mind, a number of new anti-avoidance measures targeted at Irish Real Estate Investment Funds ("IREFs") and Irish Real Estate Investment Trusts ("REITs") were announced. Furthermore, there is an increase in the stamp duty rate on non-residential property from 6% to 7.5% as well as a targeted stamp duty provision in relation to schemes of arrangement involving a 'cancellation scheme' where used for the sale of a company. These updated anti-avoidance measures generally take effect as of today, with transitional measures applying on the 1.5% stamp duty rate increase referenced above. While targeted measures to prevent avoidance are always welcome, more general changes to a regime that has already been subject to significant change in recent years could negatively impact investor sentiment.

Rental sector

The Minister recognised that the high cost of rent is a concern and has allocated circa. €2 million of additional funding to the Private Residential Tenancies Board to investigate non-compliance with the 44 rent pressure zones currently in place.

Although acknowledging the burden felt by those in the private rental sector, the Minister failed to introduce any specific measures to assist the private rental sector.

Measures such as the introduction of a tax deduction for Local Property Tax paid on residential properties failed to materialise. 

Housing supply or homeowners

It is clear from Budget 2020 that the Government realises reliance cannot be placed solely on private developers to increase the supply of housing in the State. While private developers have a role to play in addressing the current social and affordable housing deficit, the State has significantly increased its involvement in this sector. 

The Minister announced the commitment of €2.5 billion of funding to the Housing Programme with a specific commitment of €1.1 billion to deliver 11,000 new social homes in 2020 and 12,000 new social homes in 2021. Engagement with the credit union movement continues to identify appropriate mechanisms for them to establish a vehicle to invest in approved housing bodies.

I welcome the extension of the current Help to Buy Scheme in its current form beyond the scheduled expiry date, to 31 December 2021. The Help to Buy and Home Loan schemes have bolstered the supply of first-time buyer homes, but more measures are needed. An opportunity may have been missed in Budget 2020 to broaden the scheme to include groups such as current owner-occupiers who are effectively locked in their current homes but need to trade-up. There is currently no support to enable them to do so.

Another positive measure is the announcement of the extension to the Living City Initiative to the end of 2022 which should see the continued regeneration of our key urban centres. 

Stamp duty

Given the continued need for additional capital investment in the property sector, it is disappointing to see the stamp duty rate on commercial property increasing from 6% to 7.5%. This change is in respect of transfer documents executed after midnight tonight, 8 October 2019. There are, however, transitional measures in place which will preserve the 6% stamp duty rate in respect of commercial property transactions where a binding contract has been entered into before 9 October 2019 and the contract completes (i.e. the conveyance or assurance takes place) before 1 January 2020. 

This new 7.5% rate will not only apply to transfers of land and commercial property but also to contracts for the sale of other types of assets, such as debtors, goodwill or the benefit of contracts, and to premiums payable on leases of non-residential property.

It is good to see that the stamp duty rate applicable to residential property has been left unchanged at 1/2%. This includes properties within the Private Rented Sector. At a time when further market supply is critical, stability of regime is key. 

The Minister has also announced an extension of the stamp duty charge on share transfers (generally 1% but in some cases at the same rate as non-residential property, i.e. 7.5% now) to "cancellation" schemes of arrangement carried out under Part IX of the Companies Act, 2014. High Court-approved schemes of arrangement are sometimes used to effect company takeovers as they require a lower level of shareholder acceptance to push through than conventional takeovers. Heretofore, schemes of arrangement have not given rise to a stamp duty charge as they involve the cancellation of existing shares and the issue of new shares, so there is no stampable transfer of shares. The stamp duty charge on "cancellation" schemes will apply to schemes entered into on or after 9 October 2019.

Other measures

A number of new anti-avoidance measures were introduced via financial resolution tonight. These will include a limitation on the deductibility of interest expense calculated by reference to debt to property costs and income to interest ratios. The update to the IREF legislation also includes a measure to apply IREF withholding tax on gains on redemption of IREF units by taking into account the balance sheet value of the units. 

The announcement of changes to the Irish REIT regime will also see a financial resolution coming into effect tonight that will bring the distribution of property gains realised by REITs within the scope of dividend withholding tax (set to increase from 20% to 25%). A second measure will also see unrealised property gains which have accrued to a REIT brought within the scope of CGT if it exits the regime within 15 years. Previously there would have been a rebasing of asset values on exit from the regime.

While the aim or purpose of the targeted anti-avoidance measures is understood, the specific measures introduced and their effective date will have come as a huge surprise to the market and it will remain to be seen whether these could have a wider unforeseen impact to the sector.

Conclusion

Similar to recent Budgets, the Government has committed to continuing to increase housing supply. With this goal in mind, the Government has committed to a number of new measures, and extended existing ones such as the Help To Buy Scheme, which are positive measures for the sector. However, the announcement of changes to both the IREF and REIT regimes has come as a surprise to the market.

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Ilona McElroy

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 8768

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