Tuesday, 21 June 2022
Department of Finance
180. To ask the Minister for Finance the rate of tax being paid by financial investors on the profit from rents in apartment blocks and other residential property; the rate of tax paid by persons on the profits from rents from apartment blocks and other residential property; the reason for the difference in these rates of tax; if a radical overhaul of this is being examined given the forthcoming budget and the need to have an equitable tax system; and if he will make a statement on the matter. [32765/22]
In broad terms, where an individual invests in rental property via a collective investment vehicle, a tax exemption may apply within the vehicle (subject to conditions) and the investor is subject to tax when they receive distributions of profits or gains. Where an individual holds property directly, they are subject to tax on income or gains as they arise, subject to the normal payment and return filing deadlines. In both cases, the tax rates will be determined by the person's total income or gains in the relevant year, among other factors.
The following is a more detailed overview of the tax regime applicable when investing in Irish property through an investment vehicle or as an individual landlord.
In terms of investing in Irish property through investment vehicles, the primary regimes utilised are the Irish Real Estate Fund (IREF) regime and the Real Estate Investment Trust (REIT) regime. It should be noted that, as with investment vehicles generally, taxation in REITs and IREFs occurs primarily at the level of the investor rather than within the investment vehicle. Additionally, both REITs and IREFs apply withholding taxes on distributions to investors to ensure collection of tax revenues.
An IREF is an investment undertaking where 25% or more of the value of that undertaking is made up of Irish real estate assets. Generally IREFs must deduct a 20% withholding tax on distributions to non-resident investors, and further taxation is a matter for their country of residence. Certain categories of investors such as pension funds, life assurance companies and other collective investment undertakings are generally exempt from having IREF withholding tax applied provided the appropriate declarations are in place. Non-resident investors from treaty resident countries may be able to reclaim some part of IREF withholding tax if the relevant tax treaty allows for this. Irish resident investors are not subject to the IREF withholding tax as they are already subject to 41% exit tax on income/gains from funds.
Investors can also invest in Irish property through a REIT. A REIT is a quoted company, used as a collective investment vehicle to hold rental property. The function of the REIT framework is not to provide an overall tax exemption but rather to facilitate collective investment in rental property by removing a double layer of taxation which would otherwise apply on property investment via a corporate vehicle. REITs are publicly listed companies - therefore distributions are dividends within the scope of Dividend Withholding Tax, which applies at a rate of 25%. REITs are obliged to distribute at least 85% of profits annually. Irish resident investors are liable to tax at their marginal rates on dividends received, with a credit for the DWT deducted. Non-Irish resident investors are subject to DWT at 25%. Those resident in treaty-partner countries may be able to reclaim some of this DWT under the relevant tax treaty.
Institutional investment from entities like IREFs and REITs in commercial and residential property is critically important to generating additional supply of property as part of our Housing for All plan.
It is important to acknowledge that much of the residential investment committed to by institutional investors is observed by the level of forward commit transactions – that is, the provision of capital to fund the construction of new dwellings or the agreement of binding purchase contracts that de-risk a project sufficiently to enable the sourcing of low-cost financing. Without such commitment, it is highly likely that these dwellings would not be built.
The rate of tax payable by an individual landlord on rental profits will be determined by their overall level of income. Ireland has a progressive income tax system which provides that, as a person’s income increases, they move up through the various rates and bands of income tax, USC and PRSI.
Section 97(1) Taxes Consolidation Act 1997 (TCA 1997) sets out the rules for computing rental profits or gains. 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 and can be claimed as capital allowances (over eight years at 12.5% of the allowable cost per year). However, the expense must have been incurred wholly and exclusively for the purposes of the business of letting the property.
In all cases involving the letting of property by an individual, if the net rental income (gross rental income minus expenses) is less than €5,000 and if the landlord’s only other source of income is employment income, he/she must declare the rental income by filing a Form 12 return. If the net rental income is over €5,000, the landlord must register for self-assessment and declare the rental income in a Form 11 return. Returns of income must be submitted by the return filing date for the year of assessment in question.
The government is acutely conscious of the pressures facing our housing system and Housing for All is the Government’s plan to boost the supply of housing to 2030, to increase availability and affordability of housing, and to create a sustainable housing system into the future. This recognises the critical importance of both State and private funding to increase our overall housing stock. Officials continually keep the taxation of property related income under review with a view to recommending changes if required.