Tuesday, 17 December 2019
Department of Finance
Tax Reliefs Costs
148. To ask the Minister for Finance the first and full-year cost of establishing an enhanced loss relief for landlords to allow relief for rental losses against other income sources in the same year. [53432/19]
The Report of the Working Group on the Tax and Fiscal Treatment of Landlords was published by my Department on Budget Day 2017.
Ten policy options were put forward in the report, divided into short-term, medium-term and long-term timeframes. Option 3 is to enhance loss relief for landlords (or a sub-set of landlords), to allow relief for rental losses against other income sources in the same year.
Currently, landlords can carry-forward their rental losses for offset against future rental profits, but cannot offset rental losses against other net taxable income in the current year, other than other rental profits from other properties. However, rental losses can currently be carried forward indefinitely against future rental income, even after the loss-making property has ceased to be a rental property. This is in contrast to the treatment of trading losses under Case I, where the loss relief effectively ceases when the trade ceases. The current system of rental loss relief has the effect of encouraging landlords to remain in the market, in order to avail of the loss relief against future streams of rental income. Allowing offset of rental losses against all other income could potentially encourage landlords to exit the market at an earlier date, once their losses had been fully relieved against other income.
I am advised by Revenue that in 2017, the latest year for which tax returns are currently available, there was approximately €1.45bn in rental losses from prior years that were available to be offset against rental income in that year. Assuming losses of €1.45bn to be available for offset and applying an average (blended) tax rate, the tax cost could be tentatively estimated at €420m.
Revenue advise that approximately 10% of those with rental income in 2017 did not have other income sources, in which case there would be no extra tax cost for that segment. For all other taxpayers, the tax cost associated with such a change would vary for each taxpayer, depending on the nature of their income, their level of available losses carried forward, and their level of income. Also, tax returns do not separately capture unused losses for residential and commercial properties, therefore this estimate includes losses in relation to commercial properties as well as residential properties. For these reasons, the estimate presented above should be considered highly provisional.
149. To ask the Minister for Finance the first and full-year cost of allowing a deduction against rental income for the capital cost of the property in the initial years of ownership of a rental unit; and the corresponding reduction in the base cost of the property on a future disposal. [53433/19]
The Report of the Working Group on the Tax and Fiscal Treatment of Rental Accommodation Providers (published by my Department on Budget Day 2017) identified the measure suggested by the Deputy as a possible medium-term option. The report does not cost the measure but notes that three factors relevant for the costing would be:
- the reduction in current income tax revenues;
- in the longer term, the claw-back of the deduction as CGT rather than income tax, USC and PRSI; and
- the potential for loss to the Exchequer if the property is not subject to CGT in future.
I am advised by Revenue that as capital allowances in respect of the purchase of a property are not allowable, tax returns do not capture information in relation to the purchase price of the properties for which rental income is declared. As this information is not available, it is not possible to estimate the tax cost associated with the measure outlined by the Deputy.
CGT becomes payable on any gain made on the disposal rather than the acquisition of an asset.
It would be difficult to cost the Deputy's proposal in the absence of further detail for example on the number of qualifying rental properties, the duration for which such rental properties were retained and any gains made on their disposal.
I would say that the issue of a tax incentive to encourage landlords to enter into longer term leases was put forward as one of the ten options for consideration in the Report of the Working Group on the Tax and Fiscal Treatment of Landlords. This was published as part of the Budget documentation in 2017.
Using a set of modest assumptions, the Department of Finance Tax Division modelled the above option in order to provide a high-level estimate of the potential costs of implementation. The assumptions used included the following elements:
- 10% of landlords might avail of the relief
- Average property in Year 1 of €300k
- 2.5% capital appreciation each year.
The modelling suggests that the cost to the Exchequer in terms of CGT foregone could be of the order of €78 million if landlords held their properties for 5 years and then sold in year 6. The potential costs would be higher - of the order of €157 million - if the properties were held for 7 years and sold in year 8. Notwithstanding the cost of such a proposal, other issues arise. These include the potential for abuse of any such relief; the incentive effects provided by such a relief to sell the property after a specific time and how to provide for rental properties purchased between 2011 and 2014, which attract no CGT on any gains made on their sale.
This work was provided to the Committee on Finance and Public Expenditure during the Finance Bill process.
However, it should be borne in mind that the above option, which goes down the Capital Taxes route, is only one approach that might be taken. Thus, it might also be possible to incentivise the renting of property for longer periods through the provision of an incentive using the income tax system.
My Department is aiming to have a broader piece of work completed on the benefits and potential costs and disadvantages of changes in this area and whether it could play a role in future budgetary and fiscal policy.