Tuesday, 7 December 2010
Financial Resolution No. 18: Capital Acquisitions Tax
These financial resolutions set out measures which build upon previous budget measures in broadening the tax base and forming part of a move away from taxes on labour and consumption to wealth and sources of wealth. Financial Resolution No. 15 provides for a major reform of the change to stamp duty on transactions of residential property. The change involves simplification of the system by lowering the rates of stamp duty and abolishing a number of exemptions and reliefs. The stamp duty reforms, as announced by the Minister for Finance in the budget, have two aims - stimulation of the property market and commencing the necessary infrastructure for the commitment in the national recovery plan for a site valuation tax.
A new 1% rate is being introduced for all transactions of residential property valued up to €1 million. This represents a significant reduction from the current rate of 7% for amounts between €125,000 and €1 million. A new rate of 2% will apply to amounts above €1 million, replacing the current rate of 9% for these properties.
The changes in rates will act as an important stimulation to the property market by removing uncertainty and will have a positive knock-on effect on connected activities leading to increased revenue for the Exchequer. It will also significantly reduce the cost of house purchase for persons seeking to move home or purchase their first home. For example, the stamp duty on a property valued at €200,000 is €5,250 at the current rate and this will fall to €2,000, representing a saving of €3,250, or 62%. Similarly, a house valued at €300,000 will now be charged at €3,000 instead of €12,250.
In line with the base-broadening measures in this budget and to pay for the new rates, the Minister will abolish all existing reliefs and exemption stamp duty on residential property including first-time buyer's relief, relief from stamp duty on new houses under 125 sq. metres, reduced stamp duty on new houses over 125 sq. m, relief in respect of residential property transfer and exemption for residential property valued under €127,000.
Some house purchasers will now be liable to stamp duty and a small number purchasing second hand houses valued below €145,833 will have to pay more than previously. However, the recent fall in property prices means the overall cost in the transaction for purchasers is much lower than the majority of purchasers would pay.
The new rates will apply to property transfers on or after 8 December 2010. A transitional provision will be put in place to ensure anyone who has entered into a binding contract to purchase a residential property before 8 December and who executes the transfer of that property before 1 July next will not be disadvantaged. It should be noted that as a result of the changes, stamp duty will now be payable in all residential property transactions, and this information will be used to compile a database of house valuations which will underpin the development of the new site value tax announced in the national recovery plan. The finance Bill will contain details of this database, which will be established in advance of the site valuation tax.
Financial Resolution No. 16 amends section 256(1) of the Taxes Consolidation Act 1997 to give statutory effect to the new rates of DIRT applicable to deposits held in banks and other financial institutions. The changes in rates are as follows. The general 25% rate which applies to deposit interest, including deposit interest arising on special savings and special terms accounts, will be increased by two percentage points to 27%. In addition, the 28% rate is also being increased by two percentage points to 30%, and this rate applies to interest not payable annually or at more frequent intervals, or where the interest cannot be calculated until maturity of the investment. This includes investments such as tracker bonds, where the amount of interest payable depends on the changes in the financial or other index over a number of years. The resolution also amends section 267B of the Taxes Consolidation Act.
The measures relating to DIRT in this budget build upon measures undertaken in earlier budgets by the Minister. The rate increased from 20% to 23% in the 2009 budget and from 23% to 25% in 2009 supplementary budget. These changes form part of a remove from taxes on labour and consumption, as I stated earlier. In overall terms, the combined projected additional yield from the budget DIRT exit tax changes is estimated to be €22.5 million in 2011 and €30 million in the full year.
Financial Resolution No. 17 gives statutory effect to the budget announcement that the rate of tax applying to life assurance policies and investment funds is being increased with effect from 1 January. This amendment applies to the rates of exit taxes on domestic life assurance policies and investment undertakings under the gross roll-up regime introduced in the Finance Act 2000. It also increases the rates of taxes which apply to profits and gains on life assurance policies and investment funds in other EU member states, EEA states and OECD countries with which Ireland has double tax agreements.
Under gross roll-up investments, investments may accumulate without the imposition of a tax. However, an exit tax applies when a chargeable event occurs, such as the receipt of payments from or the disposal of investments in the life policy or fund, or the ending of each eight-year period following the acquisition of the policy or the units in the fund. There are varying rates of tax in these investments, depending on the frequency of payments to the investor, and additionally in the case of the foreign investments, on whether the income or gains are correctly included in the investor's tax return.
Financial Resolution No. 18 relates to capital acquisitions tax. This modifies group (a), (b) and (c) tax-free thresholds by 20%. These group thresholds depend on the relationship of the person making the gift or inheritance to the beneficiary of that gift or inheritance. The current thresholds are â¬414,799 for group A, and this will be reduced to â¬332,084; group B is reduced from â¬41,481 to â¬32,108; and group C moves from â¬15,239 to â¬16,604.
I very much welcome the Government's decision to introduce the new flat rates of 1% and 2% for stamp duty, as it is a progressive move. Unfortunately, over the years successive Governments began to recognise stamp duty as a revenue gathering exercise but historically it was never meant to be so; it was originally introduced in order to keep a record of the housing stock and sale and purchase of same. As the years rolled on it became a tax-collection exercise. The fact that there were different percentages for different valuations illustrated beyond any doubt that what I am saying was the intention.
As the property market expanded, the return from this tax, as it became, increased. As the volatility of the market surged, the amount of tax yielded from stamp duty increased in parallel. It gave a false impression and heralded false dawns, and the fact that it was meant in the first analysis to be a register of properties as opposed to a revenue gathering exercise was forgotten, and to be truthful, it became a convenient and subtle way - if I might use the term - to collect funds from citizens. Naturally, there was a tendency by all Governments not to upset the apple cart and it was never upset to any great extent until today.
The new provision will create a great deal of certainty in how to proceed in future on valuations and allow us to understand, perhaps for the first time in many decades, precisely how we stand regarding the value of property in this country. It will also provide us with a valuation base for property.
I am not given to the overestimation of officials in the Department of Finance, no more than I am given to underestimating the proficiency of the Department, nor would I for one moment accuse them of subterfuge because I know them to be very honest and decent civil servants. However, I am slightly concerned about the statement to the effect that today's provision helps us to form a valuation base. I hope that in future this will not be a valuation base or springboard to a property tax.
I do not disagree with the history provided by Deputy O'Donoghue on stamp duty and how it came to play such a significant role in the property transactions which took place here over the past 15 years in particular. It is not quite true to say nobody upset the apple cart as I remember a former colleague of the Minister for Health and Children famously announcing that his party had decided to abolish stamp duty. The quote is indelibly framed in my mind as he said we "did not need the money". How things have changed, as we need it now.
The only question which arises is how fair is this provision. Is this preparatory to the introduction of a property tax? Is this an interim measure or is this likely to be a permanent feature of the landscape? I ask the Minister to address that issue.
The current exemptions, which it is proposed to abolish, are not entirely to be sneezed at. The reliefs and exemptions which applied for property below a certain valuation and, in the case of first-time buyers, to houses below a certain square footage are not inconsequential. I ask the Minister to address that issue.
On the issue of DIRT, I am not sure I understand the difference between the two DIRT rates. What is a long-term DIRT account as distinct from an ordinary DIRT account? Are the former savings accounts which mature after three or five years and to which the higher DIRT rate applies? In the circumstances in which we find ourselves we cannot very much disagree with the measure.
The subsequent resolutions in respect of tackling the increase in the rate of life assurance exit tax and reducing the thresholds for capital acquisitions tax are not designed to yield a great deal of income and the Labour Party does not take particular exception to them.
The debate should focus on stamp duty. Is it envisaged that the proposed changes will be permanent? I ask the Minister to respond on the exclusion of current exemptions and indicate how the changes will knit into the finance Bill in terms of the property tax about which the Government gave a commitment to Ajai when he was here. Will Mr. Chopra be on the telephone to find out how this tax is to be implemented if we depart from it in any way?
The accompanying documentation provided indicates that revenue from stamp duty in 2011 is expected to be â¬36 million over the full year. On how many transactions is this estimate based? I am not aware of many transactions being completed last year. Certainly the difference between the projected figure and the many billions of euro collected in stamp duty in the past ten years is significant.
I concur with Deputy O'Donoghue that the introduction of levies of 1% on all transactions up to â¬1 million and 2% on all transactions of more than â¬1 million will bring some element of certainty to the stamp duty regime. I suspect, however, that there are few houses in my constituency or that of the Minister which will sell for more than â¬1 million.
The debate on the stamp duty measure ignores one group which is about to be clobbered again. I refer to those who are caught in negative equity. Let us consider the case of a couple who bought their home for â¬400,000 or â¬500,000 at the height of the boom and paid the guts of â¬50,000 to the State by way of stamp duty. The value of their asset will have reduced by 40% or 50% and may be worth â¬300,000. If they are fortunate enough to be able to afford to sell their home, the will be hit a second time. Changes in the stamp duty regime and measures elsewhere in the budget do not do anything for those, including many of our constituents who are caught in negative equity.
Not once in his Budget Statement did the Minister for Finance refer to those caught up in this position. Notwithstanding that the measures will move us towards a better stamp duty system, one group is trapped in a nightmare. They were hit by the initial stamp duty they paid to the State, hit a second time by a substantial fall in the value of their asset and will be hit a third time if they are lucky enough to sell their house.
Some of the proposed changes, especially the measures on stamp duty, are somewhat academic because I do not envisage they will deliver a substantial increase in revenue to the Exchequer. People cannot secure loans to purchase a second-hand car, much less obtain substantial mortgages to purchase homes. I used the qualification "somewhat" when I described the changes as academic because the second element of this measure is that it will function as an intelligence gathering exercise. I concur with Deputy O'Donoghue that the proposal lays a foundation for a property tax as it will provide some indication of house values. It is typical of the Government to seek to introduce a property tax rather than a wealth tax. Taxing people who can barely pay their mortgages or in some cases cannot pay them is hardly a correct or wise approach.
I welcome the proposal to increase DIRT tax from 25% to 27%, although I would have preferred the rate to increase to 30%. Such a measure could be a little unfair but it would encourage people to utilise their money by investing it or putting it to uses other than allowing it to lie idle in banks. To that extent, the 2% increase in DIRT tax is useful.
I support the reduction in the stamp duty rates to 1% and 2% and hope the measure will boost the housing market. The banks must come up to the mark following this measure because people who are seeking loans and are capable of repaying them are being stymied by banks' refusing to lend to them.
While I acknowledge Deputy Rabbitte's point regarding the abolition of exemptions for first-time buyers and purchases of houses with certain floor areas and so forth, all taxes should be made as simple as possible. In this respect, the introduction of a 1% rate of stamp duty for properties sold for less than â¬1 million and a 2% rate for properties sold for in excess of â¬1 million is the correct approach.
Deputy Noonan suggested that the National Asset Management Agency should dump a couple of billion euro worth of housing on the market to achieve floor prices. I agree with the thinking behind the Deputy's proposal, albeit not the process. Recently, a number of housing estates were placed on the market by receivers or liquidators at low prices. NAMA and the banks should exert pressure to accelerate the process in respect of companies that are in dire trouble from which they will not be able to emerge. A housing bank should be placed on the market to create a floor in prices.
I concur with Deputy Morgan on the changes to DIRT tax. An increase of 2% in the rate is reasonable because a substantial amount of the money held in savings should be invested in businesses to create employment.
We are witnessing a deathbed conversion by the Government on the question of tax versus property reliefs and a belated admission that the latter are unsustainable. The exemption threshold for stamp duty is set at â¬127,000, a modest price to pay for a house even in today's deflated market. Why was consideration not given to introducing a baseline threshold of 1% on house purchases? A threshold creates circumstances in which people become fearful of exceeding the sum in question and inhibits prices from exceeding a certain level.
I would like to hear what consideration was given to introducing a 1% tax on the first euro spent on the purchase of a house.
Another issue mentioned by Deputy Hayes and other speakers was negative equity which, according to figures, will generate an estimated income of â¬36 million next year. I am not sure how that figure was arrived at given that the market is not active in any way and when there are people are in negative equity the chances of second-hand home sales taking place next year will be very low. A particular concern is repossession whereby a person's home is sold against his or her will. Will the 1% tax apply? Will the person be taken to the High Court, have the home repossessed and when banking and legal fees are cleared remain in negative equity after the sale with a tax to pay as an additional penalty?
The language used by the Minister today is very worrying. He spoke about stimulating the property market. This was the type of language that got us into the difficulty in the first instance. The situation was that investment property was favoured over residential home occupation. I am very concerned to hear this sort of language being reintroduced. What we need to see in the housing market is normalisation whereby residential ownership is preferred over investment development. Key to that, although it seemed to be secondary in the Minister's presentation, is the issue of a house price register data base. That appears to be an aside to the taxation model after which, when the taxation measures are put in place, we will consider having a house price register data base. We should have heard about such a data base tonight because it is a key issue and an immediate priority. It would provide the sort of normalisation that would bring back confidence to the housing market.
When the Government tinkered with stamp duty before the predicted consequences did not happen. What was said would happen did not transpire; very often the opposite effect was seen in the property market.
We are being given very little information as to the reasoning of the Government in this respect and it would have been much more helpful, for example, had we been given a table with the old stamp duty rates being compared to the proposed rates. I note, for example, that, on page 33, 2% is substituted for 9%. Will the Minister clarify what the 9% figure comprised? Why is 2% being substituted? I have a vague idea what may be the reason but perhaps the Minister will clarify. The point needs to be made that whatever were the wrongs of the previous stamp duty regime, it did not cause the property bubble. The fact that we were getting so much money from stamp duty may have made the Exchequer too reliant on the property bubble but stamp duty of itself did not cause the bubble. One point about the old regime was that people were differentiated. First-time buyers were differentiated from investors. That seems to have gone now and everybody is to be treated the same way. We may want to get the property market moving again but we do not want to encourage and help vulture investors to come here and buy property on the cheap. Will the Minister explain what the 9% charge was so that we may be sure about what we are doing?
I welcome the change. I understand the point some Members are making. They regret that first-time buyers will not get the benefits they previously did. Traditionally, we always tried to stand up for and support the first-time buyer but, to be fair, such buyers are no longer the most needy group.
If such buyers can get a loan, they do rather well. The group people want to help now are those who bought houses or, in particular, apartments, some years ago and now want to trade up and buy a family home but are in negative equity. We probably cannot do anything very positive for them but at least we are now asking them to pay only 1% if they trade up with their negative equity rather than whatever the rate was - 5%, 7%, 9%, or whatever. This measure goes some way towards rectifying the situation for the group which is most needy at present.
The Commission on Taxation recommended that we substantially lower the rate of stamp duty but broaden its base and the Minister clearly took that on board in his budgetary decision to make the rate 1% or 2%. I am trying to remember what the previous higher rate applied to; I believe it was â¬655,000. The first â¬125,000 had a zero rate, the next â¬875,000 was at 7% and for a price higher than that the rate was 9%. As I understand it, when one went over that price one paid 9% on everything. I remember during the last election, which seems such a long time ago, my colleague suggested that instead of jumping from 7% to 9% and paying 9% on everything that the rate be tiered. The situation may have changed even since then. At the time we were running enormous surpluses, as everybody knows.
The idea now is that everybody will pay something, either 1% or 2%, which is reasonable. In order to broaden the base there are to be no exemptions, including for new houses or lower-priced second-hand houses. It is not a prerequisite for a property tax but will provide key information and a data base in regard to site and property values which we have not had before. I have no doubt that such a database will be important in informing all of us about the upcoming site valuation tax which is mentioned in the four year plan.
Deputy Rabbitte raised the issue of DIRT. As I understand it, there are differences in products sold by insurance or investment holding companies, such as collective investment undertakings where interest is not paid on an annual or fixed basis but is rolled up and paid infrequently or on the maturity of the investment. When I asked if the 30% rate equates with the 28% rate on deposits and savings accounts where interest is paid frequently I was advised it is not scientific but is as close as possible to equating the two situations, as between-----
I ask specifically about DIRT and about people who are retired or on pension, who have a nest egg or whatever. They saw the tax gradually rising from 20% in recent years to virtually 30% in some cases. I ask the Minister to clarify at what age exemptions will apply after this measure is implemented.
I have a brief supplementary question. There was a reference in the Minister's speech to a new discounted tenant household purchase scheme in which an additional discount would be given to tenants who wished to purchase their local authority home. Will the new stamp duty regulations apply in that case, given that the transactions are less â¬1 million?
Perhaps I may be of assistance to the House. The Minister proposes that the current tenancy purchase programme, at 3% for a maximum of ten years, will now be extended to 15 years, giving a 45% reduction in the purchase price of the local authority house. Two years ago during discussion on the Housing (Miscellaneous Provisions) Bill we proposed this to the Minister but he did not accept it at the time. If a person purchases a property from a local authority through a tenant purchase programme, will stamp duty apply?
Off the top of my head, if we are talking about everybody being equal, I would imagine it does, once one takes off the discount on the amount one actually pays. The officials will clarify that for me.
With regard to the exemption from DIRT, the annual exemption limit is currently â¬20,000 in the case of a single person and â¬40,000 in the case of a married couple. That has now been reduced to â¬18,000 and â¬36,000 respectively.