Revenue had warned that lucrative tax break would 'clog up' housing supply
The Revenue Commissioners warned that investment funds holding billions of euro worth of residential property would hoard properties, rather than sell on the open market, following the introduction of a lucrative tax break.
Email correspondence released under the Freedom of Information Act to Sinn Féin show that tax officials suggested that property funds would "clog the market". An incentive allowed them to avoid capital gains tax (CGT) if they held the property for five years.
CGT is levied at 33pc of the profits from the sale of property, and the Department of Finance was told that a five-year exemption for certain types of funds would impact on supply and result in a "lock" in the residential market.
A senior official in the Revenue Commissioners warned in November last year that entire blocks of apartments had been bought between 2014 and 2016, in many cases from the State, and that these units would generally be sold on the market.
But they warned: "Specific concerns were raised about the five years [CGT exemption]...as they [funds] simply won't release for sale until this expires. It creates a bit of a lock on the residential market. The individual sale of these was always the intention.
"They sell in blocks of one or two every month until the block is fully sold over to the tenants/buyers. Now the block is incentivised to be held for five [years] so they won't be released until 2019-2021."
Further correspondence to the Department of Finance added that the incentive would "clog the market temporarily".
An official in the Department of Finance noted there was a "valid point" made that the capital gains tax exemption "could negatively affect residential sales in the short term", but added it should bring more rental units on stream.
The CGT incentive was introduced in last year's Finance Bill to encourage funds to purchase and develop housing to help increase supply.
Sinn Féin finance spokesman Pearse Doherty said the effect of the policy was to "clog up supply". The party opposed the introduction of the measure.
"I believe this is of major tax benefit to these funds. These funds are buying up much of Ireland," he said.
"The consequences of this would mean less property on the market.
"This is just unforgivable. The effect of this policy was to clog-up housing supply for buyers at a time of a drought in supply, pushing up house prices. It is unacceptable that the change was brought in without this analysis being presented."
The Revenue Commissioners said it did not wish to comment, but the Department of Finance said the "minimal loss of tax" which incurred was offset by bringing new sources of capital into the property market.
It said the CGT exemption was designed to encourage the "long-term holding and management of income-producing rental property" which would lead to a more sustainable market.
"Although a gain may be exempt where the property is held for more than five years, tax will still be payable on the rental income that is being generated," said a statement.