IPOA Criticise Government’s Tax Proposals For REITs

IPOA has criticised the Government’s proposed measures for dealing with REITs and other funds that acquire residential properties for rental.

Investment funds or Real Estate Investment Trusts (‘REITs’) benefit from tax treatment that allows rental income to be earned free of income tax and capital gains to be tax free.

Private landlords currently pay income tax up to 51% on rental profits and 33% on capital gains.

Tom O’Brien, Chairman of the Finance Committee of the Irish Property Owners’ Association said that the Government’s announcement last night, failed to address the imbalance that exists in the tax regime for REITs and private landlords. “There was nothing in last night’s announcement to address the inequity of the income tax regime that REITs enjoy over private landlords.  In fact, the proposals ignored the fact that these funds are paying no income tax on sizeable rental portfolios whilst private landlords pay income tax at 51% and cannot get the government to agree to allowing basic deductions for standard business expenses such as LPT.  There is no basis or logic for the disparity in treatment although the Government will point to supply as an excuse. Does the much greater supply provided by the private landlord not count in this regard?”

There has been concerns in certain sectors that the introduction of tax measures could result in an exit of investment funds from the market which O’Brien disagrees with. “I don’t buy the claim that these funds will exit the market if a level of tax is levied on them. The level of return that these funds are enjoying from a gross rental roll up scenario far outstrips what they can get in other asset classes in other jurisdictions and therefore there is scope to introduce a flat rate of income tax without impacting demand from the funds. This would also enable the Government to afford hard pressed private landlords some relief from the excessive tax burden that they currently pay.”

“The measures introduced last night will have very little impact on the REITs as the vast majority of their investments are in the apartment market which is exempt from the stamp duty measures announced last night.”

O’Brien said the tax breaks that REITs benefit from go far beyond the old Section 23 Capital Allowances schemes.  “The tax regime for investment funds is ironic given that the old Section 23 schemes were heavily criticised due to their perceived cost to the Exchequer. The tax regime for REITs is essentially Section 23 for life without any caps or restrictions. The Section 23 Capital Allowances schemes were far better value to the taxpayer as they secured much needed housing stock, but they ended after a maximum of ten years. On the contrary the REIT schemes continue forever without any return to the Exchequer and the reality of the situation is that the supply being brought to the market by these funds will come at a significant cost to the taxpayer at a time when the Exchequer finances will be under severe pressure. I don’t see any justifiable basis for continuing them in their current format.”

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