Chartered
Tax
Consultant
Stage 3 Module 5
Land and
Property
Presenter Name – Michael Smith
22 July 2011
Location Chartered Accountants House
www.charteredaccountants.ie
EDUCATING
SUPPORTING
REPRESENTING
Module 5 – Learning Objectives
What should know by the end of Module 5?:
• Tax legislation – explain, interpret and
apply key sections to land and property
• Calculate tax liabilities
• Deal with compliance matters
• Advise clients on compliance obligations
and manage compliance risk
Introduction
• Property related legislative developments:
– Residential property tax introduced &
abolished in 2001
– NPPR tax €200
– PRTB registration
– CGT on development land changed from 40%
to 20% (1998) to 25% (2009)
– Special rate of 20% income tax on profits from
dealing in & developing land from 1 December
1999 to 31 December 2008.
Introduction
– Normal income tax rates on such profits from
1 January 2009
– Profits and gains from rezoning subject to
80% windfall tax from October 2009 (NAMA
legislation)
– VAT on property rules overhauled July 2008
– Interest deduction for rented residential
property restricted to 75% from 2009
– High earners restriction limits claims for tax
based property incentives since 2007
Module 5 - scope
• Finance Act 2010 – property related tax
issues
• Tax heads – income tax/corporation tax,
CGT, stamp duty, RCT and VAT
• Property holding structures
• All legislative references are to TCA 1997
unless otherwise stated
Capital investment or Trading?
• Income not defined
• S.18 – income tax charged on “annual
profits or gains”
• Annual indicates recurring rather than
once-off transactions
• First issue to decide is whether trading or
capital investment
Capital investment or Trading?
• Example:
• - compare acquire site and build to sell,
• - with acquire building as investment
Capital investment or trading?
• Site purchased,
housing units built
and sold to owneroccupiers and
=
investors
Most Likely to be:
Trading activity as
annual recurring profits
– income tax applies
• Rental property
acquired, sold
after many years
of renting
Most Likely to be:
Once-off capital gain
– CGT applies
=
Capital investment or Trading?
• S.639 – S.644
• - special land-dealing legislation
• - may deem an activity to be trading or
taxable as income under Schedule D,
Case IV
Land dealing & development legislation
• S.640(2)(b) – Sch D Case I trade, if land
acquired as part of a business of dealing
in land and the person disposes of an
interest in that land
• - there must be a “business”
• S.641 – sets out computational rules to
calculate profits
Land dealing & development legislation
• Meaning of “business” – not defined so
consider relevant case law
• IRC v Marine Steam Turbine Co. Ltd:
• - “term means an active occupation”
• S.643 – anti-avoidance provision that
seeks to tax capital gains arising from
land deals as income under Case IV
Land dealing & development legislation
• S.643 – applies if both general income tax
principles and S.640 do not apply
• Consider:
– Badges of trade – Module 2
– Review company Board minutes
– Accounting treatment
– Banking documentation showing short
or long term motives
Irish case law
• Land-dealing legislation introduced to tax
land-related business activities as trading
income following two leading cases:
• Birch v Delaney (1936)
– Building leased under long lease for
large premium and small ground rent
rather than sold outright not taxed as
trade under general principles
Irish case law
• Swaine v V.E. (1964)
– Land acquired with intention of farming
rather than development not taxed as
income even though houses
subsequently built on it
• Legislation covers both DEALING and
DEVELOPING land
Development
• S.639(1) – defines development
• Revenue guidance notes – development
includes certain engineering operations that
adapt the land for materially altered use
• Does not include:
• – repairs, maintenance, works which do not
adapt land for materially altered use, or
applying for/obtaining planning permission
S.640 TCA 1997
• Where transaction occurs in the course of
a business of dealing in or developing
land
• Profits/gains taxed under Sch D Case I
• Applies where:
– Full interest in property not disposed of, and
– Interest in property not acquired during the
course of the business
Dealing in Land - business
• These legislative provisions now deal with the
issues that arose in the above cases
• S.640(1)(a) defines a dealing in land as:
• – “ taking place where a person with an interest
in any land disposes as regards the whole or
any part of the land, of that interest or of an
interest that derives from that interest”
• If carrying on business of dealing in land, not
necessarily regarded as a trade but may still be
subject to income tax
Dealing in Land - business
• S. 640(1)(b) – a person who secures the
development of any land shall be regarded as
developing that land
• A business of dealing in land, which may not
necessarily be regarded as a trade, but may
still be subject to income tax
Dealing in Land - business
Example:
– Tony inherited a farm of land on the death of
his father
– He continued to farm the land but a number
of years later he discovered that there was
better money to be made if he instead
applied for planning permission on part of
the farm and sold sites to a developer
– Are the profits from the sale of sites subject
to income tax or CGT? Why?
Dealing and developing - trade
• Where dealing in or developing land is a
trade:
• S.641(2) sets out computational rules:
– Consideration received, other than
amounts taxed as rent or a premium,
are trading receipts for disposal of stock
Dealing and developing - trade
– Any interest in land remains stock until
sold by land dealer, or the trade ceases
even if leased before sale (e.g. TB73
and rent-to-buy schemes)
– This effectively prevents a builder
renting a property prior to sale to claim
property as an investment and subject
to CGT
Dealing and developing - trade
S.641
– Land deemed to be acquired at market value
if not purchased for money’s worth (e.g. gifts)
or if a capital asset becomes trading stock
(e.g. when farmer decides to appropriate
land to dealing or development trade)
– Licence fees for land are usually treated as
trading receipts rather than Case V
– For example where a farmer licences land to
a developer so the latter can build on that
land
Connected parties – S.642
S.642 covers two situations which arise in the
transfer of land
Rule #1:
– If land transfers at greater than market
value from a non property dealer to a
property dealer, and they are connected,
– the dealer only gets a tax deduction for
market value as the acquisition cost
Connected parties – S.642
Example:
– Aidan has substantial capital losses
forward from selling his bank shares.
– He also owns land with planning
permission.
– He sells the land to his land-dealing
company at an inflated price.
Connected parties – S.642
Without S.642:
– his personal capital gain would be
sheltered by capital losses, and
– the company would have a large base
cost when calculating profits on sale
With S.642:
– the property transfers at market value
– the capital losses still shelter the gain but
the company has a lower base cost on
future sale of the developed land
Connected parties – S.642
Rule #2:
– If land is sold by a property dealer to a
connected party who is not a property
dealer:
– the property dealer is taxed on the full
market value of land
Connected parties – S.642
Example:
– Lovely Homes Ltd, a property development
company, transfers its stock of unsold
houses to its 100% shareholder, John, who
intends to lease them and generate rental
income for himself.
– To reduce the tax on transfer, the stock is
sold at cost rather than market value, which
is higher
Connected parties – S.642
Without S.642:
– the company would have no tax liability
With S.642
– market value is imposed, giving rise to a
taxable profit in the company
– This treatment doesn’t apply if both
parties are traders in land – WHY?
Anti-avoidance
• S.643
• Contains provisions to prevent indirect
disposals of Irish property to avoid landdealing rules
• Also prevents income receipts being turned
into capital to be taxed at lower rates
• Applies where any part of the land is Irish
land
Anti-avoidance
• Example
– DealCo acquires land through a
subsidiary company, BuildCo
– BuildCo builds a factory on the land
– DealCo sells the shares in BuildCo
– This indirect disposal of land would be
taxable under Case IV
Example
• Joe
• Arguments for trading:
– Scale of expenditure to obtain planning
– Breaking up land into smaller sites
– Number of contracts entered into
Example
• Joe
• Arguments for capital investment:
– No history of property dealing or
development
– Land was acquired for farming
– Was main reason for selling financial?
– Also need to consider Badges of Trade
Factors indicating capital investment
• Banking – long term finance suggests
investment motive
• Correspondence with banks, solicitors,
auctioneers
– was property actively marketed or was
there an unsolicited approach
• The land is rented for reasonable return
Factors indicating capital investment
• Accounting treatment – the land is not
held as trading stock
• Land sold in one block
• Company Board minutes – review for
motive of sale
20% tax rate on residential land
• Special tax rate of 20% on dealing in and
developing residential land
• Abolished from 1 January 2009
• Now subject to marginal tax rates
(individuals) or 25% (companies)
• S.644AA – pre-2009 losses from
residential development land restricted to
a 20% tax credit
Windfall Gains Tax
• S.649B – introduced by NAMA Act 2009
• 80% tax rate
• Gains and profits on disposal of
development land where a rezoning took
place on or after 30 October 2009
• FA 2010 widened scope by introducing a
Relevant Planning Decision (RPD)
Windfall Gains Tax
• An RPD means a change in zoning from
– Non-development use to development
use (e.g. agricultural to residential), or
– From one development use to another
(e.g. from commercial use to mixed
commercial/residential use)
• Applies to Development land only
• - MV > CUV
• - what is CUV?
Windfall Gains Tax
• The 80% rate is charged on the increase
in land value due to the RPD
• The balance of the gain will be taxed at
normal 25% rate
• The windfall tax will not apply to:
– Disposal due to CPO
– Disposal by a company in which NAMA
has a shareholding, or a 75%
subsidiary of such a company
Windfall Tax
– Where the site sold is ≤ 0.4047
hectares and MV at the date of disposal
is ≤ €250,000 (unless it forms part of a
larger transaction or a series of
transactions)
• Windfall gains can only be sheltered by
windfall losses
Windfall Gains Tax - Example
• Francis inherited 10 acres of agricultural
zoned land from his father in 2007 at a
value of €100,000.
• Following an RPD in October 2010, 5 acres
were zoned commercial use and the value
increased from €200,000 to €400,000.
• He sold the zoned land to a property
developer in January 2011 for €750,000,
when the CUV was €250,000.
Windfall Gains Tax - Example
• Calculation of gain on disposal:
Sales proceeds – base cost
= €750k – €100k = €650,000
– Amount subject to 80% windfall tax
= €400k – €200k = €200,000
– What amount is subject to CGT = €?
Transfer of Assets
• S.596 – transfer from investment to
trading stock
–deemed at market value, subject to
election to transfer at NG/NL
• Useful if recipient has land dealing losses
to set against land dealing profits
Transfer of Assets
• Trading stock to investment
–No specific TCA provision
–But S.641(2)(b) states property held as
trading stock remains so until sold or the
trade is discontinued
• How could this problem be overcome?
Corporation tax considerations
• Sale of fully developed land – 12.5% rate
• Dealing in partially developed land –
excepted trade taxed at 25% under S.21A
• Construction activities – 12.5% rate as
not treated as development for CT
purposes
• Apportion mixed profits on just and
reasonable basis (S.21A(2))
Corporate v Individual Structure?
• Individual
–Marginal income tax rates apply to
property dealing/developer individuals,
including PRSI, levies and USC;
–CGT if not dealing
• Company
–12.5% or 25%
–CGT on accessing funds on liquidation
Corporate v Individual Structure?
Example:
• Dealing in land profit €100,000
• Compare tax implications of different
holding structures
Corporate v Individual Structure?
Individual
Trading
Individual
investment
Co.
Excepted
trade
Co. sells
fully
developed
units
100,000
100,000
100,000
100,000
Tax rate
55%
25%
25%
12.5%
CGT on
liquidation
N/A
N/A
25%
25%
Effective tax
rate
55%
25%
43.75%
?
?
?
?
?
Profits
Net
proceeds
Investment Properties
• Individuals - rental income subject to income tax
• Companies
• - 25% corporation tax plus close company
surcharge on undistributed estate income,
effective rate 40%
• - Double charge to CGT if held by a company,
CGT on sale by company and CGT on
distribution of net proceeds on liquidation or
sale of company
• Generally advisable to own investment property
personally
Banking issues
• Construction finance – loan to
construction co. or to shareholder who
lends to co.?
• S.248/S.250 - interest as a charge
deducted against income but not gains
• Investor will not get deduction for interest
against CGT (S.552)
• Company law restrictions on using
company assets to secure personal
borrowing
Banking issues
• Loan to or from a participator may have
income tax issues
• - Loan to participator
– gross up
– withholding tax
– BIK
• - Loan from participator
Companies’ Compliance
• Companies – CGT filing and payment
dates for development land gains
• Non-development losses cannot shelter
development land gains
• Development losses shelter both
development and non-development land
gains
• Windfall tax – income tax provisions and
payment dates apply
Residential development land pre 2009
• Individuals
• 20% rate on profits unless opted out of
special regime
• Opt-out allowed loss relief at marginal
rates by offsetting residential
development land (“RDL”) losses against
other income
Residential development land pre 2009
• Companies
• 20% tax rate on profits
• Opt-out allowed excepted trade loss relief
at 25% against total profits of current year
and prior year, and carried forward
against future profits of same trade
Individual RDL - post 2009
• 20% rate abolished from 1 January 2009
• Marginal rates of tax applied on residential
dealing / development profits
• Pre-2009 losses:
– Tax credit at 20%
– Offset against other income of that year
– Unused credit can be carried forward against
profits of combined trade
Individual RDL - post 2009
• Pre-2009 losses:
– Terminal loss relief restricted to RDL trade
profits
• If loss claim is made before 7 April 2009 – no
restriction
RDL Losses – Example A
• RDL Losses 2008
• Other income 2008
€750,000
€500,000
Loss claim pre - 7/4/2009
Other income
S.381 relief
Taxable income
€500,000
(€500,000)
NIL
• Losses carried forward:
– €250,000 @ 20% = €50,000 credit against tax
on future profits of combined trade
RDL Losses – Example B
Loss claim post 7/4/2009
Tax Computation:
€35,400 @ 20%
€464,600 @ 41%
€500,000
7,080
190,486
197,566
RDL loss tax credit (150,000)
Tax liability
47,566
Company RDL loss relief
• Losses post 1 January 2009
• Offset against trading profits in current &
prior year on € for € basis (S.396(2))
• Loss relief under S.396 and S.420 will
apply to losses incurred in RDL trade post
1 January 2009
• Losses forward from pre 31 December
2008 will be reduced by 20%
Company RDL loss relief
• Losses pre 1 January 2009
– tax treatment depends upon whether
loss claim made before 7 April 2009
– S.644C loss can be offset on a value
basis (@ 20%)
• Terminal loss carried back on value basis
if pre-7/4/2009 claim not made
• Similar restrictions and value basis for
group and consortia RDLs
Company RDL loss relief
Example - €140k RDL loss 2009
Case I 2009
20,000
Less RDL
(20,000)
Case V 2009
120,000
Tax: 120k @ 25%
Loss relief on value basis:
(€140k – 20k = 120k @ 20% =
CT liability 2009
30,000 = relevant CT
(24,000)
6,000
Company RDL loss relief
• Loss forward from 2008 reduced by 20%
• Gives rise to problems if loss forward is
due to stock revaluation pre-2009
• On a future sale, actual profit may be less
than taxable profit
Company RDL loss relief
Example:
Stock cost
Revaluation of stock ‘08
€2m
€1m (€1m loss)
Loss fwd to 2009 restricted €800k
Sales proceeds 2010
Taxable profits
Actual P&L
€2m
€200k (2m - stock - loss)
€NIL (€2m - €2m)
Property Developers – Capital Allowances
• Certain tax based commercial/industrial
property incentives
• Property developer holds relevant interest
• Construction/refurb done by THAT
property developer or connected party
• No capital allowances given
Property Developers – Capital Allowances
• Restriction does not apply where property
purchased from an unconnected party,
even if that person is a property developer
• Restriction on allowances only applies to
industrial and commercial buildings
• Allowances that cannot be claimed are
lost – they cannot be carried forward to
later years
What is a property developer?
• S.372A definition – “wholly or mainly” test
• Compare turnover from trade of construction with
turnover from other trading income, i.e. not profit
or non-trading income
• Apply test on annual basis – may be property
developer in one year and not in the next if
turnover ratio changes
• Limited application in practice – WHY?
Example
Tax year
Pty Dev.
T/O
2009
€100k
Land
Rent
dealing
T/O
€70k
€40k
Property
Developer?
2010
€40k
€100k
€40k
28.5% - Yes
2011
€90k
€91k
€40k
49.7% - No
58.8% - Yes
Note 1 – look at trading turnover, not total income so rental
income irrelevant
Note 2 – Property developer in 2009 & 2010 so can only use
certain capital allowances to shelter rent or other income. In
2011, subject to High Earners Restriction
PPR with development value
• S.604 PPR CGT exemption
• Garden up to 1 acre can qualify if sold
with or before house
• Gain attributable to development value
(i.e. gain greater than current use value
as a residence) not exempt
PPR - Example
Facts:
Sales proceeds
CUV
Costs of disposal
Base cost 2006
CUV (cost)
Occupied as PPR
Computation
Sales proceeds
Costs of disposal
€700,000
€350,000
€10,000
€250,000
€250,000
50%
Cost of acquisition
Gain
PPR relief (note 1)
Taxable gain
Note 1:
Sale price as residence
Costs of disposal
(10k * 350 / 700)
Cost as residence
Gain PPR
PPR relief 50% use
700,000
(10,000)
690,000
(250,000)
440,000
(47,500)
392,500
350,000
(5,000)
(250,000)
95,000
47,500
Relevant Contracts Tax – RCT
• S.530 – S.531
• Revenue have clarified with e-Briefs and
Tax Briefings
• Principal contractors withhold 35% RCT
from payments to subcontractors in
absence of valid C2
• Tax withheld from VAT exclusive amount
Relevant Contracts Tax – RCT
• Payments can be made gross if:
– subcontractor has C2, and
– Principal contractor has relevant
payments card (RCT 47)
• Significant consequences if RCT not
operated correctly, even in no loss of
revenue situations
RCT - Example
RyanCo provides staff to BuildCo a
construction company based in Dublin.
RyanCo invoices BuildCo €20,000 for staff
costs for December 2010.
What amount should BuildCo pay?
Relevant Contracts Tax
What is RCT?
– Withholding tax that a Principal
Contractor must deduct from payments
to a Subcontractor carrying out
Relevant Operations under a
Relevant Contract
Relevant Contracts Tax
Key terms:
– Principal contractor – may include local
authorities, semi-State bodies,
connected parties etc.
– Subcontractor
– Relevant operations = Construction
operations, meat processing and
forestry operations
Relevant Contracts Tax
Key terms:
– Construction operations = S. 530(1)
– Relevant contract = S.530
Example
Joe is a carpenter who works exclusively for
BuildCo. He has a current C2 and BuildCo
has received a relevant payments card in
respect of Joe.
Joe invoices BuildCo €12,000 for work done
in November 2010.
• What are the main tax issues?
• How much should Joe receive?
RCT – Connected Persons
• A person connected with a company
carrying out construction operations is
deemed to be a principal contractor for RCT
• Can cause difficulties and has been a very
contentious issue with the Revenue
RCT - own use exemption
• Contracts for building activities for personal
or building use are excluded from the RCT
regime
• Examples:
– hire a plumber to fix the bathroom in your
PPR, or
– engage a builder to erect a factory for use
in manufacturing trade
RCT - own use exemption
• Overridden by connected party rules
- For example a person engages a
connected construction company to build
him a house for rental, (subject to “minor
repairs or improvements” exception for
contracts less than €20,000 in TB71)
RCT – own use exemption for companies
• S. 531(2A) - Own-use exemption extended
to the following connected companies:
– Company connected to a principal
contractor who engages subcontractor
for personal/business purposes and
company is not itself engaged in land
development or construction
RCT – own use exemption for companies
– Company in a group who is connected to
another construction company in the
group but not itself engaged in land
development or construction
– Minor repairs and improvements on
contracts less than €20,000 (TB71)
RCT – Build-to-let exemption
• Extension of own-use exemption to
properties built for letting or investment
purposes
– Tax Briefing 26
Example
• Colm who is the owner of CB Builders
Limited, decides to renovate his PPR.
• He hires an independent builder to carry
out the work
• Total cost of work is €24,000
• What issues does Colm need to consider?
RCT compliance– principal contractor
• Register for RCT within 21 days of entering into
relevant contract (Form TR1, TR2 or P33)
• Both parties complete Form RCT1 confirming
relevant contract, not contract of employment
unless subcontractor has provided a notice of
exclusion
• Submit Form RCT 46 / 46A to receive relevant
payments card RCT47 – complete RCT47 with
details of payments made and RCT withheld, if
any
RCT compliance– principal contractor
• Withhold 35% RCT from all payments by
principal contractors to subcontractors in
respect of carrying out a relevant contract, in
the absence of valid C2 or if RCT47 has not yet
issued
• Issue RCTDC (C45) to subcontractor if RCT
deducted from payments
• Remit regular Forms RCT30 and annual
RCT35
RCT compliance - subcontractor
• How to obtain C2
• - Complete Form RCT5 and PC5
• - Satisfy a number of conditions:
– Has entered into a relevant contract
– Has a fixed place of business
– Tax compliant
• RCT applies if relevant operations are carried
out in Ireland
RCT compliance - subcontractor
• Present C2 to principal contractor in order
to receive payments gross
• Principal then applies for relevant
payments card
• If RCT withheld from payments, refunds
can be obtained or the tax withheld can
be offset against other tax liabilities on
presentation of RCTDC to Revenue
Property Valuation
• Accounting principles apply in absence of
specific legislation to the contrary
• SSAP 19 / IAS 40 – investment property
• Reclassification from stock to investment
asset if change of use e.g. rented or no
longer held for sale
• Restatement to fair value if material to
financial statements
Property Valuation - example
• MixedCo Ltd is a property development
company.
• In 2010, there are 10 completed unsold units.
Development WIP is stated at €500k per
property, although with the downturn in the
property market, the units are unlikely to fetch
more than €300k each.
• MixedCo decides to rent 5 of the units to
generate cash to started repaying construction
finance to the bank. It intends to sell the other
5 units when the market recovers.
Property Valuation - example
• Accounting treatment:
– Write down cost to lower of cost and
NRV – loss of €200k per unit.
– Transfer 5 units at €300k each to
investment assets on balance sheet
CGT Withholding Tax
• S.980
• – purchaser withholds 15% of VAT inclusive
sales proceeds if:
– over €500k and specified asset,
– No clearance certificate “CG50”
CGT Withholding Tax
• Specified assets
– Land & buildings in Ireland
– Minerals & mineral rights
– Exploration or exploitation rights
– Unquoted shares deriving value from the
above
– Goodwill of trade
Apply for CG50
• CG50 will usually issue if:
– vendor Irish resident,
– no CGT is payable,
– CGT is computed and paid by nonresident vendor, or
– vendor’s Irish resident solicitor gives
undertaking to retain sufficient sales
proceeds to satisfy CGT liability
VAT on Property – pre 1 July 2008
• S.4 VATA 1972
• VATable supply of immovable goods if:
– Property developed after 1 November 1972
– Taxable interest greater than 10 years
disposed of
– Disposal was in the course of business
– Vendor entitled to VAT input credit on
acquisition or development of property, AND
– Economic Value Test EVT satisfied
VAT on Property – pre 1 July 2008
• Anti-avoidance provisions apply VAT on
certain disposals of property connected
with development agreements
• Example
• Developer enters into agreement with
farmer whereby he will build houses if
farmer will transfer site to those
purchasers
• Transactions connected
• Farmer must account for VAT
VAT on Property - Development
• S.1 VATA 1972 definition of development
– A new building is constructed, altered,
reconstructed
– An existing building is demolished, or
– Some engineering or other operation or other
work is carried out which adapts an existing
building for materially altered use
VAT on Property - Development
• Excludes:
– Works not for materially altered use, e.g.
road laying, fencing, draining for agricultural
use
– General repairs and maintenance
– Grant of planning permission
VAT on Property – taxable interest
• Disposal of interest of 10 years or greater
= supply of immovable goods
– Sale of freehold
– Grant of lease > 10 years
– Assignment / surrender of lease > 10 years
• Interests (e.g. leases) < 10 years =
“service” not “goods” and exempt from
VAT in absence of waiver of exemption
VAT – Long Leases
• VAT payable upfront on the “capitalised
value” of the lease
• Three methods of valuation of capitalised
value
– Rent * 75% * lease term
– Multiplier 21.27
– Professional valuation
VAT – Long Leases
• VAT @ 13.5% on capitalised value and no
further VAT on the rent
• VAT4A procedure removed VAT cashflow
if both landlord and tenant entitled to full
input credit
– Form 4B issued
– reverse charge by tenant
VAT – long leases example
Henry granted John, a butcher, a 20 year lease of
a retail unit for €20k p.a. rent
• Capitalised value:
– €20k * 75% * 20
= 300,000
– €20k * 21.27
= 425,400
– Valuation by competent valuer, say,
€500,000
VAT – long leases example
• VAT @ 13.5% on capitalised value =
€300k * 13.5% = 40,500
(can choose any of 3 values above)
• Before entering into the lease, Henry
applies for a VAT4B and John enters
€40,500 in both the T1 and T2 of his VAT
return
VAT on property - EVT
• Applied to all leases > 10 years, including
grant, assignment and surrender
• Purpose to ensure capitalised value of lease
not less than cost of development or
acquisition, particularly where no input credit
for tenant
VAT on property - EVT
• EVT had to be considered for every property
involving lease of 10 years or longer
• Failure of EVT = exempt supply and
clawback of VAT recovered on acquisition
and development
• In example, if the cost of Henry’s
acquisition/development was €480,000, only
third method of calculating capitalised value
would pass the EVT
VAT on property – short leases
• Leases less than 10 years
• VAT exempt -1St Sch Para (iv) VATA 1972
• Clawback landlord’s VAT on
acquisition/development
• Waiver of exemption – charge 21% VAT
on the rent to avoid clawback
VAT on property – short leases
• Waiver applied to ALL short term lets –
care required
• Cancellation of waiver – balancing
adjustment if VAT recovered > VAT
charged on rent
• No new waivers allowed on residential
lettings post 2 April 2007
VAT on Property - post 1 July 2008
• No distinction between short and long
lettings – all leases exempt with option to
tax
• Freeholds and freehold equivalents e.g.
999 year leases – supply of goods
• VAT life of property and Capital Goods
Scheme CGS
VAT on Property - post 1 July 2008
• VAT4A procedure and EVT abolished
• No new waivers post 1 July 2008
• Development since November 1972 no
longer relevant – consider most recent
development, occupation and use instead
New VAT on property - sale of freehold
• S.4B VATA 1972
• VAT on disposal if:
– Property developed (similar definition to
old rules, other than minor
development)
– Supplied in course of business
– The property is a “new” property
New VAT on property - sale of freehold
• No VAT registration threshold for property
supplies
• Anti-avoidance provisions re sales
connected with development agreements
retained
New VAT on property - sale of freehold
• Supply of “old” property is VAT exempt
• Minor development – does not adapt
property for materially altered use AND
cost of development < 25% of
consideration received on sale
Meaning of “new” property
• 5-year rule:
– Property new for 5 years after property
“completed” (from later of first construction or
most recent development)
• 2 year rule:
– Property has been sold or transferred to
unconnected person after completion – new
for following two years following occupation
• Completion – property can be used for purpose
for which it was designed AND utility services
are connected
Meaning of “new” property
• Uncompleted supply – always taxable.
• 2/5 year rules only apply post-completion
• Occupied = in use for purpose allowed under
planning permission
• Sales of residential property by property
developers ALWAYS subject to VAT on first
sale, regardless of 2 or 5 year rules
Second or subsequent sale
• Liable to VAT if:
–Sold within the 5 year period, and
–Less than 24 months aggregate occupation
• Even where 24 months occupation, second
sale VAT exempt if:
–Sale takes place after previous supply on
which VAT chargeable
–Previous sale was after most recent
completion
–Previous supply not between connected
persons
New property – example 1
• Property developer constructs a factory,
which is completed in 2010.
• Sell before 2015 – new property and
charge VAT on sale
• Sell after 2015 – no longer new and VAT
exempt supply, repay VAT recovered on
construction
New property – example 2
Property developer constructs a factory,
which is completed in 2010
1. Lease and then sell to John in 2012 –
first sale within 5 years of completion so
charge VAT on sale
2. John occupies building for 18 months
and then sells – second sale but
occupied for less than 24 months so
charge VAT on sale
New property – example 2
3. John occupies building for 3 years –
second sale but occupied for more than
24 months so sale is exempt
4. If John is connected to property
developer, his sale is not a second sale,
so must charge VAT if sold within 5
years of completion in 2010
Option to Tax
• Exempt supply = VAT clawback for vendor
on original acquisition/development cost
• Joint option to tax by purchaser and seller
– VAT charged on the sale
– no clawback for vendor
– purchaser acquires new capital good
Option to Tax
• Purchaser accounts for VAT on reverse
charge basis
• No VAT cashflow if purchaser has 100%
entitlement to VAT input credit
• Option is joint so purchaser’s agreement
is necessary. May not be forthcoming if
purchaser has less than 100% entitlement
to VAT deduction
Option to Tax - Example
• A Ltd purchased new property from
unconnected developer in 2009 for €2m +
13.5% VAT of €270k.
• Used building in its trade for 4 years and sold
to B Ltd, a financial services company, for
€4m in 2013.
• Sale is exempt with joint option to tax as
second sale since completion and occupied >
24 months
Option to Tax – Example cont.
1. B Ltd agrees to joint option:
– B Ltd self-accounts for €540,000 in T1
of VAT3 return.
– No simultaneous T2 entry as B carries
on an exempt activity so net cost to B
Ltd is €4m + €540k VAT.
Option to Tax – Example cont.
2. B Ltd does not agree to joint option
– B Ltd pays €4m for the property and no
VAT return entry.
– A Ltd repays some of the VAT on its
original acquisition in line with CGS
(dealt with later)
New rules - lettings
• S.7A VATA 1972
• All lettings, regardless of lease term,
exempt from VAT with LANDLORD option
to tax commercial lettings only
• Option to tax – no clawback of VAT on
acquisition/development for landlord and
21% VAT charged on rent
New rules – lettings cont.
• Option to tax must be stated in writing to
tenant
– Usually include in lease agreement
• Options to tax apply to individual
properties
• Option to tax can be terminated in writing
or automatically in certain circumstances
Option to tax lettings – exclusions
• Leases of residential properties
• Certain lettings to connected persons
• Where property occupied by person
connected to landlord
• - anti-avoidance to drip-feed VAT
clawback over VAT life of property
Option to tax lettings – exclusions
Example:
A grants a lease to B, an unconnected person,
and opts to tax the letting.
B sublets the unit to C, who is connected to A.
As C is connected to A, the option to tax the
letting from A to B is terminated even though
they are themselves unconnected
Residential lettingsrelief for property developers
• Tax Briefing 69 – Revenue concession
• Clawback of VAT on lease of new
residential property by property developer
spread over 20 years rather than upfront
in Year 1
• VAT charged on sales proceeds when unit
is sold and no further adjustment required
Property developers’ relief - example
VAT recovered on construction (2009)
€20,000
Lease commencement date
1-1-2010
House completed
30-06-2009
Developer’s year end
31 Dec
House sold €200,000
1-07-2011
First interval
1-7-09 to 30-06-10 No VAT adjustment
(1st 12 months)
Second interval 1-7-10 to 31-12-10 Repay 1/20th VAT €1,000 in
Jan/Feb 2011 VAT3, pay by
(to end of AP)
19 Mar 2011
Third interval
House sold 2011
Charge 13.5% VAT of €27k
on sale price, no further
adjustment
VAT on Property – Transitional Rules
• S.4C VATA 1972
• Applies to property owned at 1 July 2008 and
transaction relating to it happens post 1 July
2008
• Sale of freehold – if no VAT input credit on
acquisition/development, exempt sale with joint
option to tax and VAT accounted for on reverse
charge basis by purchaser
• Sale of freehold – if vendor entitled to input
credit on acquisition/development, 2 and 5 year
rules above re new and old properties apply
Transitional rules assignments/surrenders
• “Legacy lease” – lease > 10 years held at 1
July 2008
• Post-1 July 2008 assignment/surrender has
VAT consequences if tenant entitled to VAT
input credit on acquisition/development of
leasehold interest or, if not, if landlord opts
to tax the assignment/surrender
• The new tenant (on assignment) / landlord
(on surrender) self-accounts for VAT on
reverse charge basis on provision of
“document” from other party
Transitional rules – waivers of
exemption
• Waiver in place on 1 July 2008 – continue to charge
21% VAT on rents
• No waivers on properties acquired or developed post
1 July 2008
• Waiver automatically cancelled if letting at 1 July 2008
was to connected person unless tenant had >90%
VAT recovery or VAT on acquisition/development
recovered by landlord repaid over 12 years of lease
commencement date
• Waiver cancelled and cancellation adjustment
potentially required on sale of property
Capital Goods Scheme - “CGS”
• S.12E VATA 1972
• VAT life of property – 20 years (new) or 10
years (refurbishment)
• VAT deductibility reflects use (taxable or
exempt) to which the property is put over the
course of its VAT life
• 1st interval – 12 months
• 2nd interval – to end of accounting period
• 3rd interval onwards – accounting periods
The Big Swing
• Special rules where taxable use in a later
interval differs by more than 50% of
taxable use in initial interval
• Adjust in year the big swing occurs
• Can result in large VAT refund or liability
depending on % deductibility in initial
interval
The Big Swing - example
VAT recovered in initial period (100%) 100,000
Deductible VAT over 20 years
Use periods 1-10
5,000 p.a.
100%
2011 – co. provides additional financial services
70% turnover now VAT exempt.
The Big Swing - example
Taxable use interval 11
(9 full intervals remaining)
Revised deductible VAT
€5,000 * 30% p.a.
VAT clawback =
30%
1,500
???
CGS Record
• Capital Good Records MUST be kept by
capital good owners
• Significant penalties apply in the absence
of a CGS Record
• Details of acquisition and refurbishment
costs and annual adjustments must be
recorded for each capital good
• Development = new capital good
Disposal of property – CGS
• Exempt disposal
– Deemed exempt use for remainder of
VAT life
– May result in repayment of VAT to
Revenue
Disposal of property – CGS
• Taxable disposal
– Either disposal of new property or
exempt with joint option to tax exercised
– Deemed taxable use for remainder of
VAT life
– May result in refund of VAT if less than
100% deductibility on
acquisition/development
Disposal of property – CGS
• Purchaser with less than 100%
deductibility may negotiate a higher
purchase price to share the burden of the
VAT clawback with the vendor
• Watch other non-VAT tax consequences
of changes to purchase price
Lettings and CGS
• Option to tax rents
• May depend upon circumstances of
tenant
• - fully taxable tenant
• - tenant engaged in exempt activities
• Requires care
Transitional assignments and
surrenders
• Legacy lease assigned or surrendered
within 20 years of creation or most recent
assignment of that lease
• If tenant entitled to VAT deducibility on
taking the lease, the subsequent
assignment/surrender is VATable
• Assignee / landlord accounts for the VAT
on reverse charge basis
Transitional assignments & surrenders
VAT on surrender:
T*N
Y
T = total tax incurred on acquisition of lease or most
recent development of property
N = No. full intervals plus 1 remaining in adjustment
period at time of acquisition of interest by person
making assignment/surrender
Y = Total intervals in adjustment period for person
making the assignment/surrender. This can
NEVER be > 20
Remember our earlier example…
Henry granted John, a butcher, a 20 year lease of
a retail unit for €20k p.a. rent
• Capitalised value:
– €20k * 75% * 20
= 300,000
– €20k * 21.27
= 425,400
– Valuation by competent valuer, say, €500,000
• VAT @ 13.5% on capitalised value =
€300k * 13.5% = 40,500
• John self-accounts on reverse charge basis
Transitional assignments and
surrenders - example
If John surrenders the lease after 5.5 years:
T =
€40,500
N =
14 + 1 = 15
Y =
20
VAT on surrender
= 40,500 * 15 / 20
= 30,375
Taxable amount = 30,375 / 13.5% = €225,000
Transitional assignments and
surrenders - example
•
Henry self-accounts for the surrender in
his VAT3 return as follows:
– T1 €30,375
– T2 (€30,375) if Henry intends to use the
property for 100% VATable activities in
future
Transitional assignments and
surrenders - example
•
John provides a document to Henry
stating:
– Number of remaining intervals in the
adjustment period i.e. 15
– VAT arising on the surrender
= €30,375
CGS – other issues
• Adjustment amount on supplies of capital goods
to connected persons – may be avoided if
purchaser agrees in writing to assume a higher
VAT value for CGS purposes
• Transfer of business relief under S3(5)(b)(iii):
– Property still new – CGS from date of
purchase
– Property old or legacy lease being acquired –
purchaser assumes original CGS of the
vendor
VAT on Property – Legal Issues
• Law Society Standard Conditions of Sale –
Special Condition 3
• Beware of contents if representing
purchaser/tenant in particular
• Review for options to tax inserted by
vendor/landlord
• Is it of benefit to purchaser to take on new VAT
life of property?
• Review Requisitions on Title – complete as part
of pre-contract enquiries before contracts/lease
signed
VAT on Property – Reverse Charge
for principal contractors
• Applies to construction services received by
principals from subcontractors from 1 Sept
2009
• Subject to reverse charge
• Subcontractors issue net of VAT invoices
• Principal responsible for accounting for VAT
• RCT operated on net of VAT invoiced amount
VAT on Property – Reverse Charge
for principal contractors
Example:
Subco Ltd provides carpentry services to
Big Builder Ltd under a relevant contract.
The invoice was for €2,000 net of VAT –
what are the companies’ VAT return
entries?
VAT on Property – Reverse Charge
for principal contractors
• Subco VAT return – no entries (WHY??)
• Big Builder VAT return:
• T1 €270 (2,000 @ 13.5%)
• T2 (€270)
Q: What are Big Builder’s RCT obligations?
Stamp Duty
• Tax on documents, not transactions
• Sale of freehold – “conveyance on sale”
stampable
• Contract for sale not stampable – it’s the
subsequent conveyance that attracts
stamp duty
• Gifts / exchanges – stampable under
conveyance on sale head (S.30 & S.37
SDCA 99)
Sub-sales
• S.46 SDCA 99
• Sub-sale relief – applies where you onsell property without taking a conveyance.
• Title finally conveyed to final purchaser.
• No stamp duty on first purchaser.
• No consanguinity relief on sub-sales.
Sub-sales
Example:
• A and B enter into a Contract for Sale of a
site for €100,000 without B taking a
conveyance.
• B enters into a contract with C to sell the
site to C for €120,000.
• A conveys the site directly to C.
• C pays stamp duty on €120,000.
• B has no stamp duty liability.
Sub-sales
• Anti-avoidance –any covenant, power,
condition or arrangement that is in a subsale contract and not in the original
contract, is ignored in ascertaining the
stampable consideration on the sub-sale
• Counters artificial attempts to reduce the
stampable consideration or market value
on the sub-sale
Sale of leasehold interest
• S.36 SDCA 99 – anti-avoidance
• Stampable if purchaser takes or is entitled
to take possession and
• transfer not stamped within 9 months of
date of contract
Create new leasehold interest
• Agreement for lease
• – not generally stampable unless term is
for up to 35 years of for indefinite period
• Grant of lease - stampable
• Duty depends on term of lease
• Premiums – ad valorem duty
Sale by gift or exchange
• Charging provision refers to a conveyance
on sale
• Generally regarded as involving monetary
consideration
• Strict interpretation of sale would not
include gift or exchange
• S.30 & S.37 deem gifts and exchanges to
be a conveyance on sale
Stamp duty – other issues
• Stamp duty on property – up to 6% rate
• Stamp duty on shares of property-owning
company – 1%
• Beware latent liabilities within company
– e.g. very low base cost of property will result
in higher CGT on future sale and double
CGT on accessing sale proceeds
– Taking on historical tax issues of company
Interlocked contracts
• Sale of site and building contract
dependent on each other
• SP 2/90 – concept of “interlocked”
• Stamp duty imposed on full consideration
• Partially build property- stamp duty on
value of site plus cost of works done
• Residential – S.29 SDCA 99: stamp duty
on combined cost of site and build
contract
Interlocked contracts - example
• Sarah acquires a site from Land Ltd for
€20,000 and enters into a building
contract with Builder Ltd, a sister
company to Land Ltd, to construct a retail
unit for €70,000.
• The site contract states that its
performance is conditional on Sarah
entering into the building contract
Interlocked contracts - example
• Sarah will pay 6% stamp duty on the
combined price of €90,000
• If the contracts were not interlocked,
Sarah would only pay stamp duty of 1%
on the €20,000 site cost
Tax Planning
• Resting on contract
• Licence agreements with builders
• Avoids double hit to stamp duty on
property developer
• Anti-avoidance provisions S.82 FA (2)
2008 – subject to Ministerial Order and
not yet enacted
• Rarely used now in practice
Penalties on undervalues - stamp duty
Undervalue
Penalty
15-30% and less than €6,350
25%
30% - 50%
50%
> 50%
100%
Penalties on undervalues – example
• Amanda gifted a piece of land to her brother
• Market value per the Deed of Transfer was
€300,000 but it was subsequently determined
to be €450,000
– Final stamp duty liability €450k * 6% with
50% reduction for consanguinity relief =
€13,500
– % undervalue = €150k / 450k = 33%
– What is the penalty for undervaluation?
Property Holding Structures
• Co-ownerships –syndicated property
investments
• Joint tenancy – passes by survivorship on
death
• Tenancy in common arrangements –
freedom of dealing with interest
Property Holding Structures
• Set up
– VAT and stamp duty on acquisition
– CAT / CGT on voluntary dispositions
• Ongoing considerations
– Limited partnership issues?
– Compliance e.g. Form 1?
– Offshore funds rules?
Property Holding Structures
• Unwinding
– CGT / income tax / VAT on disposal
– CAT treatment and succession issues
on death of joint tenant
Property transactions – Round Up
• Trading or investment – factors to
consider
• Income or capital
• S.639 - S.644 TCA 97 – land dealing
legislation
• Connected party transfers
• Anti-avoidance
Property transactions – Round Up
• Windfall Tax @ 80%
• Different holding structures options and
different tax rates
• RDLs – pre and post-2008
• What is a property developer?
Restrictions on use of capital allowances
• PPR with development value
RCT – Round Up
• Principal contractor, subcontractor and
relevant contract
• Application and exclusions
• Own use provisions – limited
• Compliance for principal and
subcontractor
Other property issues – Round Up
• Applying accounting principles to property
transactions
• Moving stock to investment assets
• CG50 procedure
VAT on Property – Round Up
• Meaning of development
• Pre 1 July 2008 rules
– Sale
– Leases – short and long
– Waivers of exemption
– Assignment and surrender
– The EVT
VAT on Property – Round Up
• Post 1 July 2008 rules
– Sale of freehold / freehold equivalent
– Joint option to tax sale
– All lettings exempt – landlord option to
tax
– Relief for residential lettings by property
developers
• Transitional assignments and surrenders
CGS – Round Up
•
•
•
•
Intervals
The Big Swing
CGS Record
Taxable and exempt transactions
VAT on Property Legal Issues –
Round Up
• Standard Conditions of Sale – Special
Condition 3
• Review for purchaser/tenant implications
• Pre-contract enquiries
Stamp Duty – Round Up
•
•
•
•
•
•
Conveyance on sale
Sub-sales
Anti-avoidance
Buy shares or property?
Interlocked contracts
Penalties on undervaluation
Holding Structures – Round Up
•
•
•
•
•
•
Co-ownership
Joint tenancy
Tenants in common
Set up
Ongoing
Disposal