Revenue rules out writedown tax

Revenue has clarified reports that mortgage holders whose bank debts are written down could be hit with a 33% tax charge.

A briefing issued by Revenue said it would not pursue mortgage holders who had a portion of their debts written off, but tax experts expect a raft of audits to make sure that bogus write-offs are not being created to lower tax bills.

The Capital Acquisitions Tax Consolidation Act 2003 states that, under any circumstance other than inheritance, a person who becomes “beneficially entitled in possession” to goods, property, or money will be subject to tax.

Christine Keily, tax analyst with Taxback.com, said the existing legislation meant people were changing from owing money to the banks to owing money to Revenue.

“Under Capital Acquisitions Tax Consolidation Act 2003 legislation, an individual is deemed to take a gift, and potentially generate a tax liability, where they receive a benefit unless they have paid full market value for that benefit.

“Furthermore, under Capital Acquisitions Tax Consolidation Act 2003 legislation, a person could be deemed to receive such a taxable benefit in circumstances whereby a debt is released.

“So, the big question here was whether debt forgiveness by the banks would trigger such a tax liability? With so many people in financial difficulty, the prospect of replacing the chasing bank with the tougher Revenue Commissioners wasn’t going to assist in their financial recovery, and therefore, a solution needed to be found.”

The Revenue clarification will be welcomed by people who had taken out buy-to-let mortgages and were now unable to repay them, she said.

“The Revenue’s e-brief provides that, where such a debt is released by a financial institution for bona fide commercial reasons, Revenue’s approach will be that the financial institution did not make a gift of any sort to the individual.

“This means that the individual would not acquire a Capital Acquisitions Tax Consolidation Act 2003 charge in respect of any such debt restructuring, forgiveness or write-off arrangement.”

The news that Revenue will not seek to claw back parts of debt settlements from buy-to-let mortgage holders will be welcomed by thousands of investment property owners.

According to Central Bank figures, 28,421 buy-to-let mortgages were in arrears of more than 90 days by the end of December, compared to 27,018 at the end of September.

However, despite the news that people will not be taxed on restructuring their mortgages, Taxback.com believes Revenue will open audits and investigations into arrangements to check they are not orchestrated for the avoidance of tax.