Tax plan to keep landlords in the rental business

The Government is going to the well again with another public consultation on how to revise the tax rules to help solve the housing crisis. 

There are compelling arguments for using the tax system to address urgent problems. A meaningful change in tax rates takes almost immediate effect because if the change is worthwhile, people will avail of the tax breaks if they can.

In the past, meaningful tax breaks — big income tax reliefs for rented residential accommodation, renewal of cities and towns, holiday cottage incentives and student accommodation tax deals — contributed to the property crash arguably because they ran on too long.

Some properties derived their value not from their location nor the accommodation they offered, but from the value of the tax relief. That wasn’t sustainable and possibly explains why recent tax reliefs to address the housing crisis have been modest and ineffective.

Nevertheless, the crisis continues. The take-up of incentives to help first-time buyers to save by refunding them their Dirt tax has been tiny. Additional deductions for landlords taking people off the social housing list are well intentioned, but by deferring the benefit for three years a key reason for a tax incentive, its immediacy, is diluted. Help-to-buy is helpful, but only if you’re well off enough to be paying €5,000 a year in income tax, and surprisingly few people are.

The new consultation offers 10 ideas to help landlords stay in the rental market or get into the rental market. Most of these are standard enough. They centre around the notion that a landlord should get a deduction from taxable income not just for the running costs of renting but also for the capital amount spent on the house or apartment in the first place.

One idea is more radical, however, and merits more attention. The radical bit of the idea is that residential accommodation lettings should be treated as a business like any other. The tax rules for calculating the income tax on rent are a law unto themselves. The reason for this is deeply historic.

Our income tax system was modelled on the UK system. In 1799, the only people who were asked to pay income tax were landowners. That meant that most of the tax rules were designed around the relationship between landlords and tenants.

Back then, if you were vulgar enough to make your money buying and selling things, you barely merited consideration in the tax acts. Employment wasn’t considered. Things have changed but key aspects of the rental rules have not changed. The main change would be if you were losing money renting a house or apartment, that loss could be used to reduce your PAYE or self-employed income, and thus reduce your tax liability overall.

At the moment it’s like there’s a ringfence around a landlord’s income. Accidental landlords could be losing money hand over fist on the tenancy, yet paying PAYE through the nose on their wages. The idea in the consultation would sort that out and leave them motivated to stay in the rental market while encouraging new landlords to invest.

It’s such a good idea that it won’t happen. Something like it was done when the holiday cottages scheme was launched, but the ability to offset rental allowances against general income was so popular the Government took fright and it lasted only a year. It is this type of radical tax approach that’s needed to help get us out of the housing slump. n Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland