The right moves
Taxation plays a key role in determining the returns from property investment and development, with subsequent effects on the supply of buildings, and the overall economy. An extremely favourable tax regime played a huge part in attracting overseas investors and restarting the property market here.
Whilst that has been pared back, it remains as a positive influence for overseas funds, but, in contrast, the tax burden on domestic investors is extremely high, by international standards. I met Jim Clery, tax partner with KPMG and head of their real estate practice, to discuss the situation.
Most large-scale investment and development in Irish property is undertaken by overseas funds. Much of this is carried out in Qualifying Investor Funds (QIFs) and the more modern Irish Collective Asset Management Vehicles, (ICAVs). As Jim Clery explained: "QIFs have been around for decades, but turned out to be suitable structures for investment by overseas funds. They were fundamental to the recovery of the property market."
In late 2016, the Government introduced a 20pc tax on profit distributions by QIFs which, controversially, was applied somewhat retrospectively. Whilst there is little evidence of investors pulling out of Ireland due to that, Clery feels it has made investors more cautious. Introducing taxes retrospectively creates uncertainty and Clery agreed that tax advisors are having to be "less-definitive" in their advice.
He points out that QIFs and ICAVs are only suitable for large-scale investment by international investors, at levels above €25m. "These funds are heavily-regulated, and therefore are expensive to run. They are for long-term investors and don't work if you are an Irish resident," he said.
Clery is scathing in his criticism of the tax regime for domestic investors, which he says is deterring investment and restricting supply. "The tax regime for Irish investors is very poor and makes it hard to get an investment to stack up. Whilst any normal company in business is taxed at 12.5pc, corporate rental income is taxed at 25pc, and then surcharged up to 40pc for private landlords. This makes it very hard for an Irish company to be a landlord," he said.
An individual investor is paying 52pc tax on their rental income, and big costs, such as the Local Property Tax (LPT), which is payable by the landlord, are not allowable as a cost. An investor buying a commercial investment property for its long-term potential is paying 52pc tax on their rental income, and 33pc tax on any capital gain.
Property investment by Irish companies and professional landlords owning more than, say, 20 properties should also be taxed at 12.5pc in Clery's view. "That would be a game changer for creating additional supply and should not impact negatively on larger funds, who operate at greater scale," he said.
The existing 'two-tier' tax system has created a void in the mid to smaller end of the market, said Clery, where developments and investments are too small for large investors such as REITs and Funds. For example, tax costs make it very difficult to find a long-term owner for a project to profitably convert an old house into six units, or to develop 10 new units for instance. The natural buyers for such schemes are domestic investors, yet, the tax costs keep such buyers out of the market and that is restricting the supply of badly-needed residential units.
On the bigger economic picture, Clery is not overly concerned that taxation changes in the US will undermine the results of successful taxation policies here. "While foreign companies may have located here for tax reasons originally, they are staying here for the talent. They are also locating here because Irish developers are producing world-class office buildings, on a large scale. Now we need to do more to accommodate the housing demands of these companies' workers. Fixing the domestic tax rules for landlords would help," he concluded.