Rise in capital gains tax feared

The property industry is always on high alert in the run up to the annual budget. Any changes in taxation can have far reaching implications, forcing developers and investors to change course.

New taxes or changes in the existing rates can be even more serious for first-time buyers and homeowners. The general expectation is that the Minister for Finance, Mr McCreevy, is unlikely to make any significant changes affecting property in the upcoming budget.

However, with the Government's tight fiscal position, there is the usual fear that he might be tempted to bump up capital gains tax (CGT) from 20 to 25 per cent - something Government supporters in the property industry do not expect.

Any increase in CGT would amount to a U-turn by Mr McCreevy, who was the first finance minister to reduce CGT (he cut it from 40 to 20 per cent) and managed to bring in a higher yield. When he reduced the tax in 1998, the Government collected €245 million, the following year it rose to €452 million and in 2000, the figure went to €773 million.

The take from the tax has since declined and accounted for €310 million in the first 10 months of this year, compared to €258 million in the same period of 2002.

The Revenue Commissioners will be well aware that a sizeable increase in CGT at this stage might well encourage dealers to revert to the type of under-the-counter deals that were part and parcel of the industry when a punitive 40 per cent rate applied.

An increase in CGT only a year after stamp duty was raised to 9 per cent on commercial properties and expensive houses could well prove to be the straw that breaks the camel's back, forcing even more investors to move their money abroad, where transaction charges are considerably lower.

The 9 per cent stamp duty has already driven several hundred million euros into the UK and European commercial property markets where Irish investors are now key players.

Another turn of the screw will only serve to increase the outward flow of funds. Even as things stand, institutions are not investing available funds in the commercial property market.

They are selling rather than buying, to reduce their property weightings after a three year slide in stock prices. The money being withdrawn from the property market will in due course be invested once more in equities in the hope that the results will be different next time around.

If the stockbrokers gets it wrong yet again, the shortfall in pension funds could be catastrophic. There are compelling reasons why much of this money would be safer in property but with pension funds already devalued as a result of the 3 per cent increase in stamp duty, the institutions have no appetite for bricks and mortar.

Charlie McCreevy could change this by restoring the 6 per cent rate of stamp duty.