Written answers

Tuesday, 15 February 2022

Photo of Cormac DevlinCormac Devlin (Dún Laoghaire, Fianna Fail)
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285. To ask the Minister for Finance if he will examine the arrangements in relation to structural improvements and enhancements to rental properties in Budget 2023 such as through retrofitting to allow these costs to be offset and treated as expenses rather than via capital allowances; and if he will make a statement on the matter. [7580/22]

Photo of Cormac DevlinCormac Devlin (Dún Laoghaire, Fianna Fail)
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286. To ask the Minister for Finance if he will examine the current arrangements with regard to improvements to rental properties which are currently capitalised over eight years given inflation rates; if he will consider reducing the time period or introducing categories for items to reflect their average useful life to encourage landlords to improve properties; and if he will make a statement on the matter. [7581/22]

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I propose to take Questions Nos. 285 and 286 together.

The tax treatment of structural improvements and enhancements to rental properties is set out in sections 75, 97, 97A, 284 and 285A Taxes Consolidation Act 1997 (TCA).

I am advised by Revenue that guidance as to whether those costs incurred should be treated as expenses or capital allowances when computing taxable profits, is provided in the following Tax and Duty Manuals, available in the “Tax Practitioners” section of the Revenue website:

- Tax and Duty Manual Part 04-08-12 - Capital Allowances and Rented Residential Premises

- Tax and Duty Manual Part 09-02-03 – Plant in leased buildings – Treatment of leasing income and capital allowances

- Tax and Duty Manual Part 09-02-04 - Accelerated wear and tear - Allowances for energy efficient equipment

In general, expenditure on structural improvements and enhancements is considered as capital rather than revenue in nature, and the expenditure would only be allowable if it was integral to the business of letting the premises.

If the expenditure on structural improvements qualifies for capital allowances, it would be claimed over eight years, rather than being allowed as a deduction from rental income in the year the expenditure was incurred.

Accelerated capital allowances for expenditure on certain energy efficient equipment under section 285A TCA, which can be claimed in full in the year of the expenditure, are not available to be set against rental income, because such allowances are only available to taxpayers carrying on a trade.

If the expenditure was found to be capital in nature, but not deemed to qualify for capital allowances, it may qualify as “enhancement expenditure” for Capital Gains Tax purposes and may be deducted when calculating the chargeable gain arising on the disposal of the property, should all relevant conditions be met.

Rental Income

Rental income is chargeable to tax under what is known as Case V of Schedule D. Landlords are entitled to deduct certain expenses from the gross rental income received and are then taxed on the balance, which is the rental profit. Generally, expenses which are capital in nature are not allowable as deductions unless they fall into the category of “plant” for the purposes of section 284 TCA 1997. However, the expense must have been incurred wholly and exclusively for the purposes of the business of letting the property.

Expenses

Section 97 Taxes Consolidation Act 1997 (TCA) provides the principal rules for the computation of profits/gains chargeable under Case V of Schedule D. Allowable expenses include:

- rents paid for property such as ground rents

- insurance premiums against fire and public liability

- maintenance of the property such as cleaning, painting and decorating

- property fees before the property is first rented out, such as management, advertising, legal or accountancy fees

- the cost of any service or goods provided by the landlord that are not repaid by the tenant (such as electricity, central heating, telephone, service charges, water and refuse collection).

- certain mortgage protection policy premiums

- expenses in between renting out the property in certain circumstances

- capital allowances

- repairs, such as rot treatment, mending windows, doors or machines

- certain pre-letting expenses on vacant residential property

- the cost of registering with the Residential Tenancies Board (RTB).

Pre-letting expenditure

Section 97A TCA provides that expenses incurred on a vacant residential premises prior to it being first let after a period of non-occupancy are authorised as a deduction against rental income from that premises. The section applies to expenditure on a premises which has been vacant for at least 12 months and must have been incurred in the 12 months before it is let as a residential premises. The expenditure must be such as would be allowed against rental income if it had been incurred during the period of letting. The deduction allowed is capped at €5,000 per vacant premises. I extended this deduction for a further three years to 31 December 2024 in the Finance Act 2021.

Capital Allowances

Generally, expenditure on a property which is capital in nature is not deductible when computing taxable profits, other than where a landlord has incurred capital expenditure on the provision of “machinery” or “plant” as defined in section 284(1) TCA. Such allowable expenditure is known as capital allowances, or “wear and tear” allowances. There is no exhaustive list as to what can be considered “plant” and the decision as to what constitutes plant remains primarily one of fact. Case law has also set out certain factors which may be considered when determining whether an expense is plant.

Capital allowances are provided for in section 284 TCA. The allowance is given for a chargeable period where at the end of the chargeable period the machinery or plant belongs to the person and is wholly and exclusively in use for trade purposes.

The rate at which wear and tear allowances on machinery and plant are claimed has changed over time. Prior to 2001, the allowances were claimed over seven years (15% of the actual cost per year for six years and 10% in the final year). Finance Act 2001 changed the period to five years at 20% of the actual cost per year. Finance Act 2003 changed the period to eight years, at 12.5 per cent of the actual cost per year.

Capital allowances are available in respect of capital expenditure incurred on fixtures and fittings (furniture, kitchen appliances, etc.) provided by a lessor for the purposes of furnishing rented residential accommodation. The allowances are available only where the expenditure is incurred wholly and exclusively in respect of a house used solely as a dwelling which is, or is to be, let as a furnished house on bona fide commercial terms in the open market.

Retrofitting and deductions

The Government last week approved the National Retrofitting Scheme, which is a package of supports to undertake home energy upgrades, for warmer, healthier and more comfortable homes with lower energy bills. The scheme will be administered by the Sustainable Energy Authority of Ireland (SEAI). Retrofitting a property would involve expenses that should be considered on a case by case basis as to whether they constitute plant for the purposes of claiming capital allowances. What constitutes qualifying plant in one case may not be plant in another, as has been determined in case law. Also, in the event that a grant is received by the person incurring the expenditure, no part of the cost to which the grant relates could be deducted either as an expense or a capital allowance when computing taxable rental profits, as the portion of the cost to which the grant relates would not have been incurred by the claimant.

Accelerated wear and tear allowances for certain energy efficient equipment

Section 285A TCA provides for accelerated capital allowances for expenditure on certain energy-efficient equipment bought for the purposes of the trade. An accelerated wear and tear allowance of 100% of the capital expenditure incurred can be claimed in the year in which the equipment is first provided and used. The incentive runs until 31 December 2023. It applies to certain classes of technology that are listed in the Table to Schedule 4A TCA, which include “heating and electricity provision”, “process and heating, ventilation” and “building energy management systems”.However, accelerated capital allowances are not available against rental income taxable under Case V; they can only be claimed by taxpayers carrying on a trade.

Regarding the specific questions raised by the Deputy, there are no particular plans in place to examine the measures along the lines mentioned by him in relation to the rental sector. Also, consistent with my Departments Tax Expenditure Guidelines, to the extent that a system of direct grant expenditure might be in place to encourage retrofitting it would on the face of it reduce the case for any further incentive measures to be put in place through the tax system.

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