'We would make matters worse'

PROPERTY RELIEFS:MINISTER FOR Finance Michael Noonan has cited a fear of widespread insolvencies as justification for not proceeding with the abolition or reduction of property tax reliefs which was proposed in the programme for government.

“We were afraid of insolvency,” said Mr Noonan, adding that if the Government had proceeded with the proposal made by the previous administration to curtail the reliefs “we would make matters worse”.

The Department of Finance yesterday published the economic impact assessment it had carried out of potential changes to the reliefs. The study found two distinct groups of investors had availed of property reliefs.

The buy-to-let schemes – both for residential (Section 23) and student accommodation (Section 50) – were primarily availed of by individual investors who did not get professional advice and who have income of less than €100,000 a year. The report notes that these properties are providing low income due to their location and are most at risk of “high levels of negative equity and arrears”.

Removing reliefs from these investors would risk removing a cash flow which is being used for mortgage payments, with a resulting impact on the wider economy, the report finds.

In contrast, professionally-advised investors favoured hotel and healthcare schemes, but the department officials concluded that scrapping these reliefs could have unintended consequences. The structures used for these schemes had tax indemnities which protect the investors against any change in the law.

The analysis finds the healthcare facilities may not have the cash to fund compensation for lost reliefs or a buy-back of the facility. This could lead to the closure or scaling back of private hospitals, with an immediate increase in costs for the public healthcare system.

Something similar could happen in the hotel sector, although the report notes that Ireland currently has about 7,000 more hotel rooms than required to meet demand.

The report concludes that the property reliefs “outlived their usefulness and contributed to excess supply” primarily in residential housing and hotels.

It suggests that no further changes should be made to reliefs availed of by professionally-advised investors until the yield from the High Earners Restriction introduced in 2010 is fully assessed.

In response to the report the Finance Bill has addressed a technical anomaly where individual investors were falling within the high earners threshold if they sold a section 23 property before the end of the 10-year holding period.

People earning over €100,000 who avail of the property reliefs will also have to pay an additional 5 per cent universal social charge on the rental income.

The reliefs will now expire in 2015.