Initial Commentary

The Minister is banking on the increased stamp duty rate not having a negative effect on the commercial property market and I hope he is correct. In this environment I think it’s a big risk. On the reverse, the Minister has decreased the 7 year CGT relief on property purchased in 2012 and 2013 to 4 years. This means if you bought property in 2012 and 2013 you can sell it now and pay no CGT on the sales proceeds. However the increase in stamp duty will mean the values of those commercial properties and land will reduce in value by about 4%, at least in the short term. On one hand they are giving benefits to get property into the market and on the other hand they are penalising you for off-loading the property. To me it doesn’t seem like joined up thinking. 

Of course what the Minister is trying to do is to get more residential property and residential land on the market and that is understandable. I believe we need to treat residential property completely separate from commercial property or alternatively treat them completely the same. The current way of doing things has not worked and will continue not to work.  To me it appears we are doing the exact same thing as we did in the early 2000’s. Hopefully the end result will be different however I wouldn’t be too sure.

The hope that Leo Varadkar’s Government would be more dynamic than previous regimes has not yet materialised, although to be fair, there is not a lot to play around with. There are some positive measures here though, including a share option scheme for employees of SME companies, a sugar tax which is welcome, mortgage interest relief is to be continued, the 9% vat on tourism is kept and 0% BIK on electric cars for employees.

Minister Donoghue barely mentioned Capital Gains Tax and Inheritance Tax and so there are little or no changes in these taxes. This means entrepreneurs are still well behind the UK when it comes to the tax rate on selling their businesses. Also, the increase in property values that we are seeing has not been catered for when it comes to inheritances as the tax free threshold for a gift from a parent to a child remains at €310k. Therefore, a single child who receives the family home on an inheritance worth over €310k will still have to pay Inheritance Tax. Did the Minister forget Michael Noonan’s previous promises in relation to this and in relation to the Entrepreneur’s Relief?

Summary of measures

Tax Cuts

• USC rates will again decrease from 1 January 2018. The 5% rate which is on income from €18,772 (increase of €600) to €70,074 is being reduced to 4.75%. The second lower rate has also decreased from 2.5% to 2%.  The USC rate of 8% on income over €70,045 stays the same. What this essentially means is that any person earning less than €70k per annum will be on a marginal rate of tax of 48.75%. That is a reduction of .25% from 2017.
• The standard rate band has increased by €750 to €34,550. This means your first €34,550 of earnings will be taxed at 20%. This is a saving of €150 a year for those earning over €34,550 per annum.
• The Self Employed and small business owners will get an increase in the Earned Income tax credit of €200. This means the credit is now at €1,150, which is still below the PAYE tax credit of €1,650.
• The Home Carers credit has increased from €1,100 to €1,200.  

Property related measures 

• Stamp duty on commercial property to go from 2% to 6% from midnight tonight. This will apply to farm land, commercial buildings, etc.
• There will be a refund of stamp duty for the sale of land that is being used for residential purposes, as long as development begins at least 30 months after the purchase date.
• 7 year Capital Gains Tax Relief that was brought in for properties bought in 2012 and 2013 has now been reduced to 4 years. A person can now sell a property bought in 2012 and 2013 and not pay CGT on the gain from now until 7 years after the purchase date.
• Mortgage Interest Relief has been extended for those who took out mortgages between 2004 and 2012. The relief will taper off over the next 3 years with 75% of the current relief being allowed in 2018, 50% of the current relief allowed in 2019 and 25% of the current relief allowed in 2020.
• Expenses which are incurred by landlords on properties are not allowed as a deduction against income if the expenditure was incurred before the property was let. A new deduction is now being introduced to allow pre-letting expenses up to €5,000 per property if the property has been empty for at least 12 months. There will be clawback of this if the property is taken from the rental market within 4 years.
• The vacant site levy is to be more than doubled, rising from the current 3% rate that applies in 2018 to 7% for the second and subsequent years.
• Help to Buy Scheme is being retained.

VAT 

• 9% tourism rate remains although the Minister’s speech implied that if prices continue to increase in Dublin then he will need to revisit this rate.
• VAT rate on sunbeds to increase to 23% from 13.5%, which is more of a health measure than a revenue saving measure.
• A compensation scheme for charities where they can get a refund for VAT spent on inputs. This is a positive step but only €5m is being made available for this scheme which won’t go far.

Business Taxes 

• A new Share Option Scheme for SME’s. Key employees can receive share options and not pay tax until the shares are eventually sold, as opposed to when they exercise the options. While we don’t have full details of how this will operate it looks like this could be a very positive introduction. (This new scheme is subject to a Ministerial Order)
• 0% BIK on electric vehicles for 1 year only. This will be reviewed along with all BIK on vehicles in the next budget.
• An extension to 2020 for accelerated capital allowances for the purchase of energy efficient equipment.
• Capital allowances related to the purchase of intangible assets will be reduced to 80% of relevant income. This comes into effect immediately and will mostly affect multi-nationals.

Agricultural measures 

• Very little for farmers but consanguinity relief on stamp duty for the transfer of farm land from one family member to another has been extended.
• Leasing of farm land for solar infrastructure is now being considered as agricultural land for the purposes of various farm reliefs. However, at least 50% of the farm must also be used for traditional farming purposes.

Miscellaneous 

• Cigarettes are again increased by 50 cent. A packet of 20 cigarettes is now roughly €12.
• No increase in the price of a pint or a glass of wine.
• No increase in petrol/diesel.
• A new sugar tax will be introduced for drinks. A 1 litre drink with over 8 grams of sugar content will see a price rise of 30 cent. Sugary drinks with sugar levels of between 5 and 8 grams will see an increase of 20 cent per litre.

Summary

The Government won’t be brought down by this budget and that’s 2 budgets now that the Government has put through. This was unexpected when the Government was patched together 18 months ago. The ordinary man on the street won’t have a major problem with anything contained in here and that’s a good thing.

The Government are banking on the 6% stamp duty rate on commercial properties financing the small tax reductions for all and the increase in all social welfare benefits. What happens if the estimates on what the increase in stamp duty will bring in are incorrect?

My view, for what it’s worth, is that low paid workers should have been helped more, social welfare payments should increase but not by €5 a week, middle income and high earners should not receive any tax deduction, as really, is €5 a week going to make a difference to these income earners?  Commercial stamp duty should have increased but only to 3%. Inheritance tax and Capital Gains Tax should have been revisited to help individuals pass on and sell business assets.

Would the Government survive if my views were considered? Probably not. But I’m not the one looking for votes when the next election comes around.

If you have any queries or comments in relation to the above please contact Dave O' Brien on 021-4641400