Government Dirt incentive for first-time buyers not a great help

First-time buyers looking to save a deposit to secure their first home can now claim back tax paid on their savings to help them on their way, thanks to a Government initiative first announced last October. However, the scheme, which exempts first-time buyers from Dirt, is unlikely to have a meaningful impact on their savings, given the low deposit rates on offer.

Moreover, as the refund is only granted once conveyancing on a property has been completed, the Dirt refund can only be claimed once the property sale has been completed. So it probably won’t help buyers to close the gap on getting a deposit together.

What is the scheme?

Last October Minister for Finance

Michael Noonan

announced that, in an effort to support first-time buyers saving for their first homes, he would allow them to save a deposit without incurring any tax on interest earned.

At first glance this would appear to be good news for savers, given the rapid rise in Dirt, the tax applied to interest earned on deposit savings.

In 2013, a third of all interest earned on deposit went to the taxman, for example, but last year this rose to 41 per cent. This means that if you earn €100 in interest, €41 will be deducted before you get your hands on it, leaving you with a gain of just €59. Moreover, moves from the Central Bank to restrict mortgage lending means that homeowners looking to purchase a house for more than €200,000 will need to come up with a deposit of about 15 per cent of the purchase price of the property. It’s a difficult task for those who must also meet the burden of rising rents.

At the time of the announcement, Mr Noonan said it was likely that the banks would introduce new savings products to support the initiative.

However, six months on, and with the Revenue Commissioners having just clarified its position, these new accounts have yet to appear.

Now that the method for claiming back tax relief has become clear, as set out in a new guide published on April 21st by the Revenue, savers may be hopeful that the banks will respond with more attractive rates to help them achieve their saving goals quicker.

When can I claim the refund?

According to the Revenue, you can only claim a refund of Dirt once conveyancing on the property has been concluded. This means that you will already have handed over your deposit by the time you get your Dirt refund, so the connection between supporting first-time buyers purchase of their first home is more tenuous than might have been the Minister’s original intention.

Typically, homebuyers have to finance the 10 per cent deposit of the purchase price required at the time of signing contracts themselves. The mortgage is usually only drawn down once the sale has been completed.

Once the sale has gone through, you will be able claim back Dirt paid over a four-year period, up to a maximum of 20 per cent of the purchase price, or in the case of self-builds, 20 per cent of the completion value of the property.

Aren’t S

tate savings tax free already? Yes. You can already avail of Dirt

free savings by opting for a State savings product offered by An Post. For example, you can earn 4 per cent over four years with the National Solidarity Bond, tax free. However, rates are typically lower than might be on offer by the banks, to compensate for the Dirt-free element.

With the new Dirt-free savings, you should be able to seek out the highest yielding accounts on offer, and subsequently get a refund of any Dirt paid on interest earned.

Who is eligible for Dirt

-free savings? According to the Revenue, a first-time buyer who purchases or self-builds a property between October 14th, 2014, and 31 December 31st, 2017, may be able to avail of the relief.

To get the relief, the buyer must not have previously purchased a property, either on their own or with another person. This means that if you are buying a house with someone else, who previously purchased a property, you won’t be eligible for the scheme – even if you personally have never bought a property.

Conversely, if both parties have never bought a house, they will both be able to claim the relief on their savings, provided that they are both registered as co-owners of the property for local property tax purposes.

How much will the scheme save me?

Unfortunately, not that much. While Dirt is quite punitive, with the Government taking almost half of everything you earn on your savings, you’re unlikely to earn very much in interest, given how low interest rates are at present.

If you must also pay PRSI at 4 per cent on your savings (those with non-PAYE income of more than €3,174), you won’t be entitled to a refund on this element, Revenue says.

Consider the example of someone who has been saving since 2012. They have finally purchased a home, and are now looking for some extra cash to help them furnish their home. But will the new Dirt scheme help them to achieve this given how long they’ve been saving?

Well let’s take a look at the maths (see Table 1 above).

So, despite saving €10,000 since 2012, this first-time buyer will only get €110 transferred into their account from the Revenue.

Enough maybe to buy some paint, but not enough to really make a difference on their financial situation.

And it wouldn’t be that much better if they were part of a couple. If they had managed to save €20,000 together over this period, then their refund would be around twice that mentioned, at €220.

How can I claim back my money?

While the Government has a very efficient method of deducting Dirt from your savings, doing so at source so you never even get your hands on it, the same cannot be said of claiming a refund. While not a complicated process, there are a couple of steps you must follow.

The Revenue has tied the refund to its Local Property Tax (LPT) system, which means that home owners must ensure that their new home is LPT compliant.

When you complete the purchase of your property, you may be given relevant LPT information, or you can subsequently contact the Revenue for this. To access the LPT website (http://iti.ms/1jfKerF), you’ll need your PPS number/tax reference number, property ID and your LPT PIN.

Once in the LPT system, you click the "Claim DIRT F.T.B. Refund" button. This will display a claim form where you enter the required information and submit your claim.

According to the Revenue, the following information is needed to make a claim:

- Amount of Dirt to be refunded

- Purchase price or completion value for a self-build

- Purchase date/completion date

- Email address

- Bank account details to which the refund is to be paid

- Evidence of Dirt deducted (ie bank statements)

You will need to attach the supporting documents to your claim.

The Revenue says it expects that claims will be processed, and DIRT refunded, once all relevant information has been received within about five working days. Getting your money back: How much Dirt will I get? Mary, a first-time buyer, buys a house on her own on October 31st 2014 for €200,000. Relief is confined to Dirt paid on savings up to a maximum of 20 per cent of the purchase price which is €40,000 (€200,000 at 20 per cent).

In the 48 months prior to the purchase date, Mary saved €30,000, earning interest of €455 prior to Dirt being deducted. She paid €155 Dirt on the interest. As the savings are under the maximum of 20 per cent of the purchase price Mary is entitled a full refund of Dirt, in this case €155.

Source: Revenue Commissioners