In this blog I will briefly overview how this relief works, but in particular I will examine how one can avail of it, even if you have not completed a property purchase by year end 2014.
The Overview
Capital Gains Tax Seven Year Relief (“the CGT Relief”) was originally introduced in the Finance Act 2012 and applied to land and buildings purchased up to 31 December 2013. The Finance (No. 2) Act 2013 extend the CGT Relief to include purchases of land and buildings up to 31 December 2014. The CGT Relief was introduced to encourage individuals and companies to acquire property in Ireland. With the growth in property prices in some parts of the country causing some unease, it is no surprise that there has been no further extension. With the deadline fast approaching it is certainly a factor in the property investor market where transaction volume is clearly on the increase.
What is the relief?
As noted above the CGT Relief applies to individuals and companies. The conditions required to avail of the relief are as follows:
The land or buildings must be acquired during the period 7 December 2011 to 31 December 2014.
The land or buildings (including rental property) must be situated in an EEA state (including Ireland);
Where the land or buildings are acquired from a third party, the consideration provided must equal the market value of the land or buildings;
Where the land or buildings are acquired from a relative, the consideration provided must not be less than 75% of the market value of the land or buildings;
The acquirer must continue to hold the land or buildings for a period of seven years from the date of acquisition;
Any income, profits or gains generated from the property within the seven year period must come within the charge to Irish income or corporation tax, e.g. where an individual rents out the property during the seven year period, the rental income must come within the charge to Irish income tax; and
The transaction must not come within the anti-avoidance provisions which deal with artificial capital loss arrangements.
The element of the gain covered by the seven year period of ownership is exempt from CGT. Therefore, where a property is to be held for say eight years, 7/8 of the gain will be exempt from CGT. If the market rises substantially, it will be a very valuable tax relief as CGT rates are currently 33%.
Am I too close to the deadline to take advantage of this relief?
With the 31st December 2014 deadline looming, the window of opportunity to complete the purchase of a property is closing fast. This raises the question of whether having signed a contract (an irrevocable legal commitment by the buyer to the seller to acquire the property at a certain point in the future typically involving the payment of a 10% to the seller pending completion of the purchase) is enough to satisfy the terms of the CGT Relief? S.604A of the Taxes Consolidation Act 1997 (the Act”) as amended confers the CGT Relief on land and building “which were acquired …in the period commencing on 7 December 2011 and ending on 31 December 2014”. So what does the word “acquired” mean? As s.604A does not contain any special definition of “acquired”, one must then refer to the general definition of “acquired” or “acquisition” for the purposes of PART 19 of the Act, which contain the “Principal Provisions Relating to Taxation of Chargeable Gains”. S. 542 of the Act tells us that “… for the purposes of the Capital Gains Tax Acts, where an asset is disposed of and acquired under a contract, the time at which the disposal and acquisition is made shall be the time at which the contract is made (and not, if different, the time at which the asset is conveyed or transferred). Therefore it is quite clear from the legislation that a legally binding contract to acquire land or building which is created prior to the 31st December 2014 will allow a purchaser qualify for the CGT Relief even if the contract/purchase does not complete until 2015 or even beyond.
Are there any hidden traps?
The main note of caution one must sound about relying on a legally binding contract to qualify for the CGT Relief is the make sure that it is an unconditionally legally binding. Subsection (b) of s. 542 states that “[w]here the contract is conditional (and in particular where it is conditional on the exercise of an option), the time at which the disposal and acquisition is made shall be the time at which the condition is satisfied.” Therefore, if the contract is created on the 1st December 2014 but is conditional upon loan approval, then it is not an unconditionally legally binding contract until the loan is approved and whatever formalities of notification to the Vendor are satisfied under the contract. So in this example if the conditional contract is created on the 1st December 2014 but the condition is not satisfied until the 1st January 2015 (e.g. when the Bank issues the loan approval) then the CGT Relief will not be available to the buyer. The types of conditions that might typically arise in respect of the acquisition of land or buildings would be contracts made conditional on loan approval, a grant of planning permission, rezoning, consent of the seller’s bank in a negative equity sale – in effect, some factor outside the direct control of the purchaser or seller. If a contract contains any of these types of conditions and such condition is not satisfied by the 31st December 2014 then the buyer will not be entitled to the CGT Relief.
Summary
In order to avail the 7 Year CGT Relief, an unconditionally legally binding contract created before the 31st December 2014 will satisfy the requirements of the legislation even where such purchase does not complete until some stage in 2015.
Fergal McManus
Disclaimer Please note that this article does not purport to be a comprehensive review of the Irish tax treatment on the CGT seven year relief. Detailed appropriate advice should be taken before any particular transaction is entered into, or a decision is made to refrain from acting and Morgan McManus Solicitors accept no responsibility in this regard. Intending purchasers must always obtain their own professional advice.