The Finance Bill, published on February 10th, is broadly favourable for property developers and people who hold land as a capital asset, such as farmers. It is intended to encourage residential development on an accelerated basis.

The tax code distinguishes between those who own land as a capital asset and those who hold land as trading stock. Broadly speaking, the income tax/corporation tax regime applies to property developers and capital gains tax applies to those who own land as a capital asset.

Property Developers

The Finance Bill provides for a 20 per cent corporate tax rate on the income of a company from selling residential development land. The rate on income from selling fully developed residential land on which houses have been completed will be taxed at the 20 per cent rate in 2000 and at the standard corporation tax rate (to be reduced to 12.5 per cent by January 1st, 2003) in future years. Residential land is land for which residential planning permission has been obtained, or land that has been zoned for use solely or primarily for residential purposes, or is being sold to a housing authority or similar body.

The Finance Bill also introduces a 20 per cent tax rate for income of an individual from selling residential land. No offset for personal allowances or credits is available in the case of this 20 per cent rate which only applies to profits from the sale of land. Any part of the profit attributable to building work carried out by the individual will be liable to tax at the top rate of 46 per cent. This contrasts with a company where such profits will be liable at the low corporate tax rate.

It may be beneficial for residential property developers to become land dealers on an individual basis and sub-contract the building activity to a company controlled by them. In such circumstances, the profit from the onward sale of the land could be received personally and taxed at the 20 per cent rate, and profits from the building activity could be received by the company and taxed at the reducing corporate tax rate.

Land Owners

Under the Bill, capital gains tax (CGT) applicable to sales of commercial development land (e.g. a farm with commercial development potential) has been reduced from 40 per cent to 20 per cent. The CGT rate for residential land was already 20 per cent.

A sting in the tail is the fact that the Bill reconfirms that a 60 per cent CGT rate will apply to disposals of land with residential zoning after April 5th, 2002. This is to encourage the early introduction of land into the supply side of the market.

Consequently, land owners considering entering into option arrangements in circumstances where a disposal could take place after April 5th, 2002, when the land is zoned for residential development, should note that a 60 per cent CGT rate would apply.

Clearly, the Government may revisit this issue in early 2002.

Gift tax has also been reduced to 20 per cent. Land owners who wish to pass some of the sale proceeds on to the next generation can now do so on a basis whereby the gift tax liability would be eliminated by offsetting the CGT payable of 20 per cent against same by way of credit.

Padraig Cronin is a tax partner with Deloitte & Touche.