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Chartered Tax Consultant. Stage 3 Module 4 Land and Property. Presenter Names – Michael Smith & Finbarr O’Connell 13 th & 14 th July 2012 Location Chartered Accountants House. Module 4 – Learning Objectives. Land Dealing & Development Windfall gains tax Investment Properties
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Chartered Tax Consultant Stage 3 Module 4 Land and Property Presenter Names – Michael Smith & Finbarr O’Connell 13th & 14th July 2012 Location Chartered Accountants House
Module 4 – Learning Objectives Land Dealing & Development Windfall gains tax Investment Properties Property Developers Rent to Buy Schemes
Module 4 – Learning Objectives PPR with development value RCT Property Valuation Stamp duty on property transactions Income Tax & CGT on leases Property Holding Structures
Introduction Property related legislative developments: Residential property tax introduced & abolished in 2001 NPPR tax €200 PRTB registration CGT on development land changed from 40% to 20% (1998) to 25% (2009 to 6th Dec 2011) Special rate of 20% income tax on profits from dealing in & developing land from 1 December 1999 to 31 December 2008.
Introduction Normal income tax rates on such profits from 1 January 2009 Profits and gains from rezoning subject to 80% windfall tax from October 2009 (NAMA legislation) VAT on property rules overhauled July 2008 Interest deduction for rented residential property restricted to 75% from 2009 High earners restriction limits claims for tax based property incentives since 2007
Module 4 - Scope Finance Act 2010 – property related tax issues Tax heads – income tax/corporation tax, CGT, stamp duty, RCT and VAT Property holding structures All legislative references are to TCA 1997 unless otherwise stated
Capital Investment or Trading? Income not defined S.18 – income tax charged on “annual profits or gains” Annual indicates recurring rather than once-off transactions First issue to decide is whether trading or capital investment
Capital investment or Trading? Example: Compare acquire site and build to sell with acquire building as investment
Capital investment or trading? Site purchased, housing units built and sold to owner-occupiers and investors Rental property acquired, sold after many years of renting Most Likely to be: Trading activity as annual recurring profits – income tax applies Most Likely to be: Once-off capital gain – CGT applies = =
Capital investment or Trading? S.639 – S.644 Special land-dealing legislation May deem an activity to be trading or taxable as income under Schedule D, Case IV
Land Dealing & Development Legislation S.640(2)(b) – Sch D Case I trade, if land acquired as part of a business of dealing in land and the person disposes of an interest in that land There must be a “business” for S.640 to apply S.641 – sets out computational rules to calculate profits
Land Dealing & Development Meaning of “business” – not defined so consider relevant case law IRC v Marine Steam Turbine Co. Ltd: - “term means an active occupation” S.643 – anti-avoidance provision that seeks to tax capital gains arising from land deals as income under Case IV
Land Dealing & Development S.643 – applies if both general income tax principles and S.640 do not apply In some cases may be difficult to determine whether trading or investment
Land Dealing & Development Consider: Badges of trade Review company Board minutes Accounting treatment Banking documentation showing short or long term motives
Irish case law Land-dealing legislation introduced to tax land-related business activities as trading income following two leading cases: Birch v Delaney (1936) Building leased under long lease for large premium and small ground rent rather than sold outright not taxed as trade under general principles
Irish Case Law Swaine v V.E. (1964) Land acquired with intention of farming rather than development not taxed as income even though houses subsequently built on it Mara v Hummingbird (1977) Whole of person’s interest not disposed Legislation covers both DEALING and DEVELOPING land
Development S.639(1) – defines development Revenue guidance notes – development includes certain engineering operations that adapt the land for materially altered use Does not include: – repairs, maintenance, works which do not adapt land for materially altered use, or applying for/obtaining planning permission
S.640 TCA 1997 Where transaction occurs in the course of a business of dealing in or developing land Profits/gains taxed under Sch D Case I Specifically applies where: Full interest in property not disposed of, and Interest in property not acquired during the course of the business
Dealing in Land - business These legislative provisions now deal with the issues that arose in the above cases S.640(1)(a) defines a dealing in land as: – “ taking place where a person with an interest in any land disposes as regards the whole or any part of the land, of that interest or of an interest that derives from that interest” If carrying on business of dealing in land, not necessarily regarded as a trade but may still be subject to income tax
Dealing in Land - business S. 640(1)(b) – a person who secures the development of any land shall be regarded as developing that land A business of dealing in land, which may not necessarily be regarded as a trade, but may still be subject to income tax
Dealing in Land - business Example: Tony inherited a farm of land on the death of his father He continued to farm the land but a number of years later he discovered that there was better money to be made if he instead applied for planning permission on part of the farm and sold sites to a developer Are the profits from the sale of sites subject to income tax or CGT? Why?
Dealing and Developing - Trade Where dealing in or developing land is a trade: S.641(2) sets out computational rules: Consideration received, other than amounts taxed as rent or a premium, are trading receipts for disposal of stock
Dealing and Developing - Trade S.641 Any interest in land remains stock until sold by land dealer, or the trade ceases even if leased before sale (e.g. TB73 and rent-to-buy schemes) This effectively prevents a builder renting a property prior to sale to claim property as an investment and subject to CGT
Dealing and Developing - Trade S.641 Land deemed to be acquired at market value if not purchased for money’s worth (e.g. gifts) or if a capital asset becomes trading stock (e.g. when farmer appropriates land to dealing or development trade) Licence fees for land are usually treated as trading receipts rather than Case V For example where a farmer licences land to a developer so the latter can build on that land
Connected parties – S.642 S.642 covers two situations which arise in the transfer of land Rule #1: If land transfers at greater than market value from a non property dealer to a property dealer, and they are connected, the dealer only gets a tax deduction for market value as the acquisition cost
Connected Parties – S.642 Example: Aidan has substantial capital losses forward from selling his bank shares. He also owns land with planning permission. He sells the land to his land-dealing company at an inflated price.
Connected Parties – S.642 Without S.642: his personal capital gain would be sheltered by capital losses, and the company would have a large base cost when calculating profits on sale With S.642: the property transfers at market value the capital losses still shelter the gain but the company has a lower base cost on future sale of the developed land
Connected parties – S.642 Rule #2: If land is sold by a property dealer to a connected party who is not a property dealer: the property dealer is taxed on the full market value of land
Connected Parties – S.642 Example: Lovely Homes Ltd, a property development company, transfers its stock of unsold houses to its 100% shareholder, John, who intends to lease them and generate rental income for himself. To reduce the tax on transfer, the stock is sold at cost rather than market value, which is higher
Connected Parties – S.642 Without S.642: the company would have no tax liability With S.642: market value is imposed, giving rise to a taxable profit in the company This treatment doesn’t apply if both parties are traders in land – WHY?
Anti-avoidance S.643 Contains provisions to prevent indirect disposals of Irish property to avoid land-dealing rules Also prevents income receipts being turned into capital to be taxed at lower rates Applies where any part of the land is Irish land
Anti-avoidance Example DealCo acquires land through a subsidiary company, BuildCo BuildCo builds a factory on the land DealCo sells the shares in BuildCo This indirect disposal of land would be taxable under Case IV
Example Joe Arguments for trading: Scale of expenditure to obtain planning Breaking up land into smaller sites Number of contracts entered into
Example Joe Arguments for capital investment: No history of property dealing or development Land was acquired for farming Was main reason for selling financial? Also need to consider Badges of Trade Consider S.640
Non Tax Factors-Capital Investment Banking – long term finance suggests investment motive Correspondence with banks, solicitors, auctioneers was property actively marketed or was there an unsolicited approach The land is rented for reasonable return
Non Tax Factors-Capital Investment Accounting treatment – the land is not held as trading stock Land sold in one block Company Board minutes – review for motive of sale
20% tax rate on Residential Land Special tax rate of 20% on dealing in and developing residential land Abolished from 1 January 2009 Now subject to marginal tax rates (individuals) or 25% (companies) S.644AA – pre-2009 losses from residential development land restricted to a 20% tax credit
Windfall Gains Tax S.649B – introduced by NAMA Act 2009 80% tax rate Gains and profits on disposal of development land where a rezoning took place on or after 30 October 2009 FA 2010 widened scope by introducing a Relevant Planning Decision (RPD)
Windfall Gains Tax An RPD means a change in zoning from Non-development use to development use (e.g. agricultural to residential), or From one development use to another (e.g. from commercial use to mixed commercial/residential use) Applies to Development land only - MV > CUV - what is CUV?
Windfall Gains Tax The 80% rate is charged on the increase in land value due to the RPD The balance of the gain will be taxed at normal 25% rate
Windfall Gains Tax The windfall tax will not apply to: Disposal due to CPO Disposal by a company in which NAMA has a shareholding, or a 75% subsidiary of such a company Where the site sold is ≤ 0.4047 hectares and MV at the date of disposal is ≤ €250,000 (unless it forms part of a larger transaction or a series of transactions)
Windfall Gains Tax Windfall gains can only be sheltered by windfall losses
Windfall Gains Tax - Example Francis inherited 10 acres of agricultural zoned land from his father in 2007 at a value of €100,000. Following an RPD in January 2011, 5 acres were zoned commercial use and the value increased from €200,000 to €400,000. He sold the 10 acres to a property developer in December 2011 for €750,000, when the CUV was €250,000.
Windfall Gains Tax - Example Calculation of gain on disposal: Sales proceeds – base cost = €750k – €100k = €650,000 Amount subject to 80% windfall tax = €400k – €200k = €200,000 What amount is subject to CGT = €?
Transfer of Assets S.596 – transfer from investment to trading stock deemed at market value, subject to election to transfer at NG/NL (S.596(3)) Useful if recipient has land dealing losses to set against land dealing profits
Transfer of Assets Trading stock to investment No specific TCA provision But S.641(2)(b) states property held as trading stock remains so until sold or the trade is discontinued How could this problem be overcome?
Corporation Tax Sale of fully developed land – 12.5% rate Dealing in partially developed land – excepted trade taxed at 25% under S.21A Construction activities – 12.5% rate as not treated as development for CT purposes Apportion mixed profits on just and reasonable basis (S.21A(2))
Corporate v Individual Structure? Individual Marginal income tax rates apply to property dealing/developer individuals, including PRSI and USC; CGT if not dealing Company 12.5% or 25% CGT on accessing funds on liquidation
Corporate v Individual Structure? Example: Dealing in land profit €100,000 Compare tax implications of different holding structures