The Department of Finance has warned that the State would face legal challenges if it tried to withdraw a tax exemption that has been blamed for fuelling land hoarding.
The exemption, which allows land owners avoid capital gains tax if they hold on to a property for seven years, was introduced to kickstart the flagging Irish real estate market in 2011.
However, it has since had the unintended consequence of encouraging property owners to sit on land in the midst of a chronic housing shortage.
In a pre-budget submission for Minister for Finance Paschal Donohoe, civil servants warned any attempt to change the scheme would open the doors to compensation claims.
The submission said: “This is because property/land owners have legitimate expectation that the relief would stay in place for the time set out . . . and may have made investment decisions that could be impeded by a possible change in timing of the relief.”
Tax relief
In Budget 2018, the exemption was changed so that property owners could instead sell the land after just four years and still get the full tax relief available.
The submission explained that there was no cost to the exchequer from making the change as the tax loss had already been locked in.
It said: “The costs of this relief have effectively already been incurred and the revenue from such gains foregone.”
Mr Donohoe was presented with three options on how to reform the exemption. In relation to the chosen option – allowing property owners avail of the full tax relief either four or six years into the scheme – the submission said: “This option will . . . require the maintenance of the option to retain the property for seven years due to possible legal challenge.”
It said that “anecdotally” a large amount of property had been bought at the end of 2013 and could therefore start becoming available for sale and development immediately. The disadvantages of this approach included the potential for creating “a glut” of land and buildings if owners began to sell en masse. The submission also warned that property owners could just disregard the changes and hold on to land in “the expectation of [further] price increases”.
A spokesman for the department said: “It is widely believed that this relief has been a factor in slowing the release of development land on to the market, as owners may be waiting for the requisite seven-year ownership period to elapse before selling.”
