The housing crisis is an ongoing challenge for Ireland that Governments have struggled with for years. Failure to tackle the crisis and provide effective solutions whilst impacting the present, also poses a significant risk to Ireland’s long term competitiveness. The younger generation are finding it difficult to afford to buy a home or even rent property. A recent research paper from the Central Bank indicated that younger generations are facing significant challenges funding their retirement and are funding a higher tax burden to effectively finance the pensions of older generations. If these structural issues are not addressed, younger generations may seek to relocate. Why work and live in a country where you can’t afford to own a home and won’t be able to afford to retire.
Failure to tackle the housing crisis also impacts on foreign direct investment (FDI) if multinational companies are unable to fill roles due to the lack of affordable accommodation for staff. With FDI making up a significant amount of tax receipts both from corporation tax and income tax in Ireland, it is important that the housing crisis is not a deterrent for businesses looking to invest in Ireland.
Currently the housing crisis is pronounced with homelessness numbers at an all-time high, a nationwide housing crisis, inflation that continues to rise, lack of accommodation for students returning to college, lack of accommodation for Ukrainians and other refugees and an exodus of smaller landlords from the market. It is clear that fresh thinking is required in order to fix the problem – which means supply of accommodation. The Government must think outside the box and introduce some changes that will entice new landlords, keep existing landlords in the market and encourage the development of affordable accommodation that is fit for purpose. Below we consider some options open to the Government in advance of Budget 2023.
Taxation of rental income
- Currently rental income is subject to top rates of income tax, USC and PRSI for individuals and a higher rate of corporation tax for corporates as well as a “surcharge” on undistributed income. Some options included:
- Removal of PRSI on rental income
- Allowance of a deduction for local property tax( LPT) against rental income
- Removal of the close company surcharge on closely held rental companies
- Increase the availability of pre-letting expenses which is currently restricted to €5,000 per property
- Last but not least, it’s time to consider reintroducing property tax reliefs. Yes, these reliefs are mostly availed of by higher income individuals. However what is also clear is that this section of taxpayers pay a significant portion of all income tax. The focus needs to be on supply of both houses and rental properties. Private landlords are needed.
Private landlords play a vital role in a functioning property market. It is important that investors can be attracted into the market and this requires ensuring that the tax system is not acting as a barrier to investors. Some options that we feel could assist include:
- Reduction in the rate of CGT (currently 33%). The Irish rate of CGT is high. A high rate of tax can act as a prohibition to activity. It is well established in Ireland that reducing the CGT rate can increase the yield from CGT as more transactions take place.
- Reintroduce CGT indexation relief. This was stopped back in 2003. However, with inflation levels at an all-time high it could be time to reintroduce indexation relief for calculating taxable capital gains.
- Consider a form of rollover relief where a property is disposed of and the proceeds then reinvested in residential rental property. Defer the tax on the gain rolled over.
- The sale of new residential property is subject to VAT at 13.5%. This is an additional cost on the acquisition of new residential properties. In the UK the sale of new residential property is zero rated. With the cost of living crisis and increasing interest rates it is important that the Government does not neglect younger first time buyers.
- There are an estimated 137,000 vacant homes in Ireland. The Government committed to introducing a vacant property tax in the “The Housing for All'' document published in September 2021. In addition, The Residential Zoned Land Tax (RZLT) which was introduced by the Finance Act 2021 will come into effect from 2024. This will replace the existing vacant site levy which has not been successful. The RZLT was introduced to encourage development of residential property in order to increase supply but also to ensure regeneration of vacant and idle lands in urban locations. Given the housing crisis we are in at the moment it is essential to bring vacant property and residential zoned land into use as a matter of urgency.
- Budget 2023 needs to look after tenants as there is a real threat of the number of people becoming homeless increasing coming into the winter months. The reintroduction of the rent credit would go towards easing the burden. However, the credit introduced in the past was minimal. We believe that it should be introduced at a realistic level to assist those that are renting.
It is vital that Budget 2023 has a coherent strategy to tackle the housing crisis. Taxing landlords to the hilt, forcing small private landlords out of the market and then asking taxpayers to “rent a room” is really not good enough. It is time for real action and leadership on housing.
We eagerly await Budget 2023 on 27th September. Please join my colleague Patrick Fannon at our Budget breakfast or online on 28th September with further discussion and insight into Budget 2023.