Monday 21 May 2018

The hidden costs of Donohoe's stamp duty hike start to bite for business

Finance Minister reveals implacable resolve that confounds his softer public image

Finance Minister Paschal Donohoe sprung a surprise when he announced the increase would apply to the sale of business assets Photo: Collins
Finance Minister Paschal Donohoe sprung a surprise when he announced the increase would apply to the sale of business assets Photo: Collins
Ailish O'Hora

Ailish O'Hora

Despite the smiling and softly-spoken demeanour, if there was ever any doubt of the steelier side to Finance Minister Paschal Donohoe it was dispelled by his inaugural budget in October.

And it came via the surprising and significant measure that saw commercial property stamp duty hiked by 2pc to 6pc as part of Budget 2018.

Then, with the farmers still reeling at the fact that the stamp duty changes applied to land transactions, he reserved another surprise for the Finance Bill when it emerged that the increase would apply to the sale of business assets. The inclusion of business assets was despite earlier indications that the hike was only applicable to commercial property transactions.

This move means that the tax will hit some corporate transactions, depending on their make-up, liquidator sales or when parts of a business are being sold off when purchasers don't want to take on associated debt.

Either way, the industry is now taking in all of these changes as the surprise element wears off and the reality of the amendments hit home.

After rumblings of post-Budget confusion from some commercial property players, the Revenue Commissioners last week clarified that transitional measures apply stamp duty at a rate of 2pc on transfers that are executed before January 1, 2018 and where there was a contract in place before October 11, 2017 that was binding on the parties.

Despite the tweaks, there are cost implications for business and some analysts have questioned whether the changes will generate as much cash as the Government expects.

It is expecting to raise nearly 25pc of the €1.2bn in tax cuts and spending hikes announced in the Budget, even though some tax specialists believe that this might just be a bit aspirational.

On the immediate cost front, Marie Hunt, executive director, head of research, at CBRE Ireland said that the commercial property stamp duty move will mean a once-off hit of about 3.8pc to property valuations and pension fund values in this quarter.

"This will see the 2017 annualised return from Irish commercial real estate easing back to single digits, albeit the rate of return remains attractive compared to returns being achieved in other European locations," she said.

"Demand still remains strong regardless with core and core plus investors chasing a limited supply of product. Going forward, we may see some assets being sold through special purpose vehicles as was the case when the rate of stamp duty was at or higher than 6pc previously."

William Fogarty, partner at law firm Maples and Calder, pointed out that the Government could have indicated a gradual increase in the stamp duty rate, rather than the 4pc hike, and that could have resulted in an increased tax take as transactions would have been accelerated into 2018 to take into account the possible future cost increase.

He added that Maples had flagged in September that the commercial property stamp duty rise was likely. "The 2pc rate was historically very low and it was inevitable that it would increase. Whether the rise took place this year or next year, we felt that the recovery in the sector was eventually going to be the target of a stamp duty change. We believe a lot of clients and industry observers felt the same way," he said.

"So the concept of an increase was not a shock, however the size of the increase was very surprising with few expecting a 4pc jump. For purchasers and sellers of property, it represents a very significant additional cost item. The acquisition of large-scale commercial properties takes several months to complete and therefore it will have impacted deals which have been in the works since as early as May and which have still to complete," he said.

But he added that the commercial property stamp duty hike shouldn't be viewed in isolation given other budgetary measures.

"This Budget might have raised stamp duty but I think we also have to take account of the fact that the Government introduced a significant change to capital gains tax on land," he said.

"Previously, land acquired between 2011 and 2015 was exempt from capital gains tax if held for seven years. This was shortened to four years, which represents a significant, and perhaps unexpected tax break for some investors. Although it's a significant change in the legislation, it has attracted less scrutiny than the stamp duty rises," Fogarty said.

However, he added that one of the most significant points to arise out of the changes is the refund issue in relation to residential property.

"Although the minister flagged that there would be a refund of stamp duty for residential property acquisitions, the details of the scheme were not immediately clear," he said.

"Purchasers are concerned at the apparent requirement to pay over significant sums initially, with the conditions and timing on the reclaim somewhat unclear. In the context of smaller developers, the requirement to fund the cost up-front, in addition to other acquisition costs, raises a few practical issues, primarily relating to where they get the cash," Fogarty added.

"In more complex transactions, where both commercial and residential development is planned, there was no clear guidance on how the scheme would operate. The amounts involved are considerable and it is difficult for purchasers and sellers to agree on sale terms. In acquiring a site for mixed use they risk creating an issue when the refund scheme is implemented," he said.

Details on the rebate are expected in upcoming Committee stage amendments to the Finance Bill.

However, Government sources said there could be some more twists in the treatment of commercial property stamp duty following the amendments.

It looks like the steely Donohoe might just have a few more surprises up his sleeve.

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