KPMG advocates suite of tax reforms to address State’s housing challenge

Big Four accounting firm KPMG Ireland has called for a suite of tax measures to address the State’s housing challenge, including a reduced rate of VAT on new homes and the reintroduction of mortgage interest relief.

In a pre-budget submission, KPMG highlighted what it described as the social, economic and business costs of the current shortfall in housing provision.

It said a “multifaceted approach” was needed to help ease “supply challenges, ensure project viability and stem the exit of private landlords from the sector”.

First on its wish list is a reduction in VAT on new housing. KPMG wants the Government to reduce VAT on the purchase of new homes from the current rate of 13.5 per cent, which it claims would boost viability.

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“Serious consideration should be given to the application of a much-reduced VAT rate on new housing as permitted by the recently adopted new EU VAT directive,” KPMG Ireland’s head of tax Tom Woods said.

“The viability of building residential units is under pressure and urgent action is needed to address the cost challenges.”

New data from estate agent DNG shows that the annual rate of house price inflation eased in the first half of the year, amid ongoing interest rate hikes by the European Central Bank, making mortgages more costly and squeezing consumers’ spending power.

House prices in the Republic, excluding Dublin, grew by 3.4 per cent in the year to June 2023, down from a rate of 7.6 recorded in December 2022 and 12 per cent in June 2022. The average price of resale properties outside Dublin was €270,744.

The decline in price growth was more marked in Dublin, where house prices rose by an average of 0.3 per cent over the year to June, compared with 8 per cent a year previously. The average cost of a home in the capital was almost €523,000.

KPMG also advocated the reintroduction of mortgage interest relief, which existed before the 2008 financial crisis. Sinn Féin has also backed the reintroduction of this relief in the face of rising interest rates. The party recently urged the Government to give a mortgage interest tax credit equal to 30 per cent of the increased interest cost up to a maximum of €1,500.

“Mortgage interest relief should be reintroduced to assist homeowners with mortgage repayments in the face of rising interest rates,” Mr Woods said.

Among KPMG’s other recommendations were a reform of the taxation of landlords “to discourage them leaving the market”; a tax relief for both employers and employees on the provision of property for employees; and a more targeted and controlled form of the section 23 tax relief for landlords to boost investment.

“The taxation of private landlords should be reformed to encourage them to stay in the market by putting them on the same footing as trading businesses,” it said.

The firm also called for changes to the residential zoned land tax, the land value sharing mechanism, and the stamp duty refund scheme, which it claimed were undermining the viability of certain residential projects.

As part of the Land Value Sharing and Urban Development Zones Bill, the Government plans to levy a 30 per cent tax on the value of land that is rezoned for housing.

However, KPMG said the proposed measure created “uncertainty and costs for existing landowners that need to be addressed before the enactment of this regime”.

In terms of personal tax reforms, the firm called on the Government to introduce more graduated tax bands and a new intermediate rate of 30 per cent as advocated by Taoiseach Leo Varadkar. It also backed the automatic indexation of bands and credits to protect against the impact of inflation.