The Government was forced to abandon a central plank of its strategy to bring down house prices after it was rendered useless by a policy failure. The decision by the Minister for Finance, Mr McCreevy, not to bring in a planned 60 per cent Capital Gains Tax on residential development land sold after April 2002 was one of the main surprises of last month's Finance Bill. The penal tax rate had been flagged since 1998 but Mr McCreevy dropped it after officials said that it would backfire and "will be impossible to defend".
The tax was one of the key elements of the Government's 1998 strategy to reduce house prices. It was the stick element of a carrot-and-stick approach adopted by the Government on the recommendation of economist Mr Peter Bacon in 1998.
The carrot was a reduction of the CGT rate on residential development land from 40 per cent to 20 per cent for three years to encourage the owners to sell it. The stick was that CGT would rise to 60 per cent from April 2002.
Documents released under the Freedom of Information Act show that the initiative was rendered useless by the 2000 Budget. As part of a policy to reduce CGT across-the-board to 20 per cent, the Minister for Finance announced that the new lower rate would apply to all sales of non-residential development land.
"The effect of this is that there is now no specific incentive to dispose of land for residential development," according to a paper prepared for the Tax Strategy Group last September.
The paper added: "in fact, the higher rate of tax from April 2002 onwards of 60 per cent, which applies only to disposals for residential developments, will act as an incentive for landowners to seek to have land zoned other than for residential development".
Although the official position - as explained to groups including the Construction Industry Federation and the Irish Home Builders' Association - was that the higher rate would be introduced, the Department was forced to rethink the issue.
A submission prepared for Mr McCreevy by his officials in January of this year recommended that the initiative be abandoned. "Unless a change is made from 6 April 2002 the CGT rate on disposals of residential development land will be three times that on non-residential development land which will be impossible to defend given the present housing situation," according to the official.
"There is a need therefore to change the legislation to continue the 20 per cent CGT rate on disposals of residential development beyond 6th April 2002," according to the document.
Mr McCreevy was given the option of either abandoning the scheme in the Finance Bill or waiting until the next Budget at the end of the year.
The argument for announcing the decision in the Finance Bill was that the threat of higher tax had probably served its purpose "of hurrying up the disposal of residential development land".
Alternatively, the Minister was told, he could wait until the end of 2001 before removing the stick in order to maximise its effect.
Mr McCreevy opted to announce the changes in the Finance Bill.
