Tens of millions of euro in potential losses to the Exchequer have been avoided after a decision by the Minister for Finance, Mr McCreevy, to close off a property tax loophole. The move is believed to have been prompted by the planned sale to investors of a large AIB building in the IFSC.
A significant number of high-income individuals are believed to have availed of the loophole in recent years, using the capital allowances available on commercial property they purchased to "shelter" significant amounts of their income from tax.
Financial and property sources believe that the Minister's move was prompted by the marketing of the AIB Treasury headquarters building in the IFSC, which is currently for sale. The major estate agents are all believed to have lined up consortia of high-income investors to bid for the property, attracted by the tax allowances.
As highlighted in The Irish Times Commercial Property section in early January, tax allowances in excess of €55 million over 12 years would have been available to the investors who bought the building, equivalent to about €4.5 million in allowances - or tax savings - per annum.
Under the previous rules, a group of investors could have used these allowances to reduce their payment of a range of taxes, including income tax - which they pay at the higher rate of 42 per cent - or dividend income from shareholding. However, Mr McCreevy said yesterday that in respect of property sales from this year, the allowances could only be used to reduce the investors' rental income, as is normal for property investment.
These will sharply reduce the amount of income which can be sheltered from tax by investors in the AIB building and are likely to lead to a sizeable fall in its selling price, which had been expected to be €90 million to €100 million.
Property sources believe that up to a dozen further buildings are likely to come on the market in the months ahead in similar tax-based schemes.
The loophole existed because the tax rules allowed capital allowances, designed to benefit companies buying properties, to transfer to individual investors who bought these properties in a syndicate.
It allowed the investors to circumvent rules introduced in 1988, which capped the amount that could be claimed in property allowances.
The Exchequer must be protected from "such contrived and unacceptable tax arbitrage", Mr McCreevy said in a statement yesterday, saying the full details of the measure would be contained in the forthcoming Finance Bill.
Revenue statistics published after the Budget showed that property investments were widely used by the wealthy to shelter income from tax, often sharply reducing their tax bill.
