10th October 2017
This afternoon, Lisney chartered surveyors made a number of observations on Budget 2018. Areas of particular relevance to the property market are set out below.
Non-Residential (Commercial) Stamp Duty
The biggest impact on the commercial property market from Budget 2018 is the increase in the non-residential stamp duty rate by four percentage points (from 2% to 6%). We believe this is an unhelpful development in the commercial market for various reasons.
- In the investment sector, the changes will affect sentiment in a market where transactional levels are declining – the amount spent on investment properties this year will only be half that of the previous three years.
- Certain avoidance measures are likely to emerge whereby properties are effectively transferred in a corporate structure.
- It will also have an impact on the value of property assets in pension funds. For every percentage point increase in stamp duty, a similar percentage decline will occur in the value of the property; once again affecting the pension pot of workers with an approximate reduction of 3.7%.
- For residential development land (which is classified as a non-residential / commercial asset for stamp duty purposes) there will be a stamp duty refund scheme if construction commences within 30 months. While it is positive that this in in place, it does mean that the higher rate will have to be paid up front, thus increasing the purchase cost for the developer and affecting viability of the scheme.
Capital Gains Tax Waiver
The CGT holiday, whereby no tax would be applied to the chargeable gain on a property held for a minimum of seven years, has been reduced to four years. This is a very positive development and will allow for a more gradual release of properties to the market in the coming years.
A total of €1.83bn was earmarked in the Budget for housing in 2018. This includes an additional €149m for the HAP scheme and €116m on homelessness. €500m will be provided for direct building which would lead to an additional 3,000 new social houses by 2021 in addition to the existing 47,000 target. With residential construction remaining below the level required, this is a welcome move.
We greatly welcome the creation of a new €750m finance vehicle, Home Building Finance Ireland (HBFI). This is a positive step and will provide commercially viable residential schemes finance at market rates. It has the potential to fund 6,000 new homes.
Additionally, we believe the continuation of the Help-to-Buy scheme is good news as it is stimulating construction within a certain price bracket for first time buyers. We do not believe it has had a significant impact on price inflation as this cohort of purchasers only account for about 2.7% of the market in Dublin.
Vacant Site Levy
Changes to the vacant site levy were announced in Budget 2018. The 3% levy rate will remain for 2019 but for the subsequent years, this will increase to a more penal 7% (previously it was 3% for each year). This will impact the price of development land, which might be the intention to facilitate development.
While we agree in principle with the notion of a vacant site tax to encourage development, we still question how this will operate in practice. The legislation states that it relates to vacant, serviced regeneration land. Much of this will be in locations just at the edge of the city centre and has not been developed to date because it is not viable. It would be more prudent to target lands in high end-value areas, where development is currently viable but not being built out. Linked to this is VAT on construction costs. We believe there is a missed opportunity to apply a reduction on a targeted (as opposed to a blanket) basis, to sites such as those in city limit regeneration areas to make them viable and hence very few sites would fall into the vacant site levy catchment.
Private Residential Investors & Universal Social Charge (USC)
To assist in the current rental crisis, private investors need to be encouraged to remain and indeed enter the market. We are on record numerous times in recent years calling for various changes. That said, while it is only a minor amendment, the reduction of the 2.5% and 5% USC rates to 2.0% and 4.75% respectively is welcome. These changes are relevant to private residential investors as the net rent received by a landlord is subject to this tax. Additionally, to encourage owners of vacant residential property to bring the unit into the rental market, a new deduction is being introduced. This relates to pre-letting expenses incurred on a property that has been vacant for a period of 12 months or more. A cap on allowable expenses of €5,000 per property will apply and the relief will be subject to clawback if the property is withdrawn from the rental market within four years. The relief will be available for qualifying expenses incurred up to the end of 2021.
Lisney welcomes the government’s commitment to maintaining the 12.5% corporate tax rate given international threats. Our corporate tax rate is of significant importance in continuing to attract multi-national companies and is particularly relevant for the office sector.