Action on stamp duty loophole deferred (Irish Times)

Action on stamp duty loophole deferred (Irish Times - 2nd July 2007)

Minister for Finance Brian Cowen has deferred a decision on whether to close a controversial stamp duty loophole used by major property developers to avoid paying the levy.

Citing the need to avoid any “unforeseen negative effect” on the property market, he has instead opted to commission an independent study of the potential effects that closing the loophole might have.

A request inviting tenders to conduct the study is due to be issued shortly.

The decision not to implement recent legislation to close the loophole comes despite the results of a Revenue Commissioners’ survey which found 60 instances where it was used over a two-year period.

Mr Cowen has previously disclosed that Revenue believes the existence of the loophole cost the Exchequer a minimum of €40 million last year. He also acknowledged that Revenue had found its use to have become “common practice” in 2006.

Under the loophole, developers do not buy lands outright. Instead, they pay the landowner a licence fee to allow them to develop the land, leaving the purchaser of any building erected on it to pay the stamp duty bill.

Under a late Finance Act amendment, Mr Cowen tightened the rules, requiring stamp duty to be paid in any contract where landowners received a licence worth more than 25 per cent of the land’s value.

In a written Dáil reply to Labour Party deputy leader Liz McManus, Mr Cowen noted that the amendment was subject to a commencement order.

“I have to consider the state of the property market before the provision comes into effect to ensure that it does not have an unforeseen negative effect on the market,” he said.

“For this reason I have decided to commission an independent study of the potential effects that such a provision may have on the market. A ‘terms of reference’ for the study is currently being finalised in my department and a request inviting tenders will issue shortly.”

In her Dáil question, Ms McManus asked Mr Cowen if he planned to ask the Revenue Commissioners to carry out a detailed examination of the number of properties availing of licensing and similar arrangements to avoid stamp duty. She also asked if Revenue had carried out an estimate of the amount of money involved between 2002 and 2007.

Mr Cowen responded: "Developers are not required to bring such arrangements to the notice of the Revenue Commissioners.

“However, I am also advised by the Revenue Commissioners that, in the course of a recent review, based on a survey of developers, of these arrangements, 60 instances of this type of transaction were identified in responses relating to the two-year period ending on December 31st, 2005.”

Figures published last week revealed that house prices fell for the third month in a row in May, and have dropped by more than 2 per cent so far this year.

According to the house price index from Permanent TSB and the Economic and Social Research Institute, buyers also paid an average of almost €2,500 less for a property in May than they did in April.

Who said the FF were not in the pockets of the builders. We have not even had the Galway races yet!!

I don’t like the tone of the articles written in the press on this issue. In all cases they imply that the end user (the house buyer) is paying the developers stamp duty, whereas the end user will still have to pay the same stamp duty whether or not the developer uses a licence. In fact, the stamp duty on the end user will probably increase, as the developer is just going to spread the cost he has had to pay over the sale price of the end units.

So the only winner is the Gov who get effectively twice the duty (well OK, not twice) for the entire process.

There’s no reason for the developer to take possession of the land, and therefore no reason to pay stamp duty.

Yes, but if price of a house is determined by how large a mortgage a buyer can qualify for then it is unlikely that the final purchaser of the house would ever have had to pay extra as he or she is already paying as much as they can afford.

Not decided on this issue myself.
Yes the developers don’t pay stamp duty on the site but I’m not sure they are evading tax in either law or spirit of the law.
On the other hand a person looking to build their own home can’t avoid stamp duty on the site they build on but a developer can engineer it for themselves that they don’t have to pay stamp duty - that’s not fair.
I’m certain the government are certainly treating developers sympathetically here and “independent study” is ringing alarm bells here.
If a politician wants to kill an issue they use an independent investigation as a means of making sure nothing happens.

I’d say the developers are privately hounding the Government about abolishing stamp duty on second hand properties.

There is going to be alot of people pulling out of deals in developement where there are management fees and parking issues. Adamstown/Tyrellstown will be hit hardest and I suspect there will be even more rediculous marketing gimmicks this autumn.

One of the best things that could come out of this price slide is an end to the ridiculous practice of selling you a property for 360k with no parking space included (ie Adamstown). What a con!

“On the other hand a person looking to build their own home can’t avoid stamp duty on the site they build on but a developer can engineer it for themselves that they don’t have to pay stamp duty - that’s not fair.”

Yeah but the developer doesn’t want or need to own the site, someone building their own house on a site will need to own it.

I agree with the posts above, the tone of the articles is very misleading. I suspect that some of the people writing these articles don’t understand the issue themselves.

What we’re talking about here is whether or not the land under the house gets sold once or twice.

There’s no benefit to either the builder or the homebuyer in having the builder buy a plot of land, only to sell it on to a homebuyer, and having stamp duty paid twice.

This isn’t a loophole that’s being exploited by developers to push tax onto joe citizen. It’s an arrangement that passes the land from the original owner to the homeowner without the builder having to buy it.

Do we really want the government collecting stamp duty for two sales of every plot of land that gets turned into a house?

Now, if you want fair, you could say that the system should be that the developer should pay stamp duty on the land when he acquires is, and the homeowner should pay stamp duty only on the house, i.e. strip out the value of the land, since it has already been paid.

That would encourage developers to actually build on land and sell it on, rather than sit on it. Of course developers might try to recoup the stamp duty by increasing house prices, but market forces are taking care of that.

I don’t know if there’s a perfect solution to this question, but enabling the government to collect stamp duty twice on a piece of land is not in anyones interest except the government.

The issue of a private citizen building their own house doesn’t come into it. They’ll pay no more in stamp duty than a person buying a prebuilt house. Ultimately the homebuyer is paying the stamp duty for a piece of land and a house.

The 40 Million mentioned is not money that the government was entitled to but failed to collect. It’s double taxation that they only managed to collect once. And long may that kind of “loophole” continue.

-Rd