Spotlight falls on the high cost of tax incentives for home buyers, builders, and landlords

There are questions about who benefits and whether the various housing-related tax incentives work, writes Eamon Quinn

To get to grips with housing shortages, the Government’s Housing for All programme plans to encourage the building of 300,000 new homes up to 2030. File Picture: Eamonn Farrell/RollingNews.ie

It’s the most important issue for voters, and Government ministers have already made it clear housing will play a significant, and costly, part in October’s budget, which could be the last before a general election.

Meantime, officials appear to be getting uneasy should their political bosses double down on costly housing tax breaks, either for home buyers, builders, or landlords, even as billions of euro flow in tax revenues into the Government’s coffers.

Last month, the Tax Strategy Group published the results of its annual review of potential budget tax changes. Chaired by an official from the Department of Finance, the group includes officials and advisers from across most of the big spending departments and cast their eye on Vat, income, and corporation taxes.

The strategy group has ways to obliquely signal its concerns. In past years, it has focused on the Government decision to further reduce the lower rate of Vat levied on hospitality businesses, to 9% from 13.5%. 

Finance officials tend to smart about temporary tax breaks or tax incentives that somehow become permanent fixtures. They lost the argument during the pandemic with their political bosses, and the “temporary” tax incentive for hospitality firms has only come to an end this week.

The tax group turned its focus on the huge costs entailed in residential housing tax incentives in a 47-page analysis. It appears to have good reason to worry.

To get to grips with housing shortages, the Government’s Housing for All programme plans to encourage the building of 300,000 new homes up to 2030. The cost of the programme — estimated before building materials inflation started to rage — is estimated at €20bn, which as the officials bluntly put it, represents “the largest ever housing budget in the history of the State”.

The purpose of the Tax Strategy Group papers is to shine a light on whether citizens are getting the best value for their tax incentives and tax breaks. And the tax documents are a reminder that tax incentives relating to housing have proliferated in a short period. 

It was soon after the disastrous financial collapse that a banking industry report first identified that a new Irish housing crisis was brewing. The 2014 report got a lot of international attention because Ireland’s property crisis had hitherto been cast by international publications as a problem of too many houses and so many ghost estates. 

International readers were surprised to learn that house prices were surging by 17% in the capital shortly after the crash because there were too few new homes being built. There is a strong case to be made that the Government responded with short-term tax credits and incentives and took too much time to address housing shortages.

Incentives for tenants and housebuyers

First up for review by the tax group is the Rent Tax Credit, which was introduced as recently as 2022. It’s a tax credit of up to €500 for an individual, or €1,000 for a couple, where a tenancy has been registered with the Residential Tenancies Board or RTB. By this summer, around 253,590 claims had been made for a total of €124m in tax credits or refunds under the scheme.

Designed to help first-time buyers pay for the deposit required under the Central Bank’s mortgage rules, the Help to Buy tax incentive appears to have been with us for an age but was introduced as recently as 2017. Available for buyers purchasing homes up to a ceiling of €500,000, it works by refunding the buyer a chunk of their Deposit Interest Retention Tax and income tax paid over a four-year period. 

Since its inception, there have been 39,615 approved claimants, at a total cost of €805m, according to the tax group. That number includes over 3,500 first-time buyers claiming the incentive for houses worth over €450,000. The average amount claimed rose to €26,270 last year from an average of €15,350 three years earlier, according to the analysis. 

The Help to Buy incentive, in its most recent iteration, is due to expire at the end of next year. 

The recent First Home Scheme or shared equity scheme, is another incentive designed to make up the difference between Central Bank rules and the price of new property. Underwritten by the Government and with loans offered by AIB, Bank of Ireland, and Permanent TSB, the scheme, however, didn’t come under the scope of the tax group review.

The Living City Initiative has been in place for eight years. It aims to encourage people to live in the centres of Cork, Dublin, Galway, Kilkenny, Limerick, and Waterford by helping with refurbishment costs for owner-occupiers, landlords, and commercial and retail owners. Since it started, there have been 471 claims seeking €4.8m under the tax incentive.

Incentives for landlords

For the Rent A Room Relief, the tax strategy group notes that almost €28m claimed by 9,931 taxpayers in 2020 came after a trend “toward an increasing number of claimants and increasing exchequer cost” over the previous four years. The scheme allows a tax relief of up to €14,000 for renting out a room in their home.

Next up for examination is the large Exchequer cost relating to the expenses landlords can claim against their tax bills. Landlords can claim 100% of mortgage interest relief since the start of 2019, which the tax group notes “is a significant support to landlords who remain within the rental market over the longer term”. 

Landlords can also claim for a long list of other expenses, including some goods and services supplied to the tenant; general maintenance and insurance; rates for the local authority; letting and advertising and accountancy fees; and the costs of registering a tenancy with the Residential Tenancy Board. 

Allowances are also available for wear-and-tear for furniture and fixtures; expenses related before the property is let; and, in recent years, incentives are available for small landlords to do certain works while the tenants stay in the property. 

For 2020, there were 152,900 claims for residential property expenses in income tax returns at a total cost of €1.2bn. That €1.2bn claimed in deductible expenses relates to €3.2bn in total rental income that landlords earned from residential properties in the same year.

The tax group also reports on progress of implementing from early next year an annual tax designed to encourage developers to build homes on zoned and serviced land.

Turning to the Local Property Tax, the group notes that since its inception, it has collected €4.5bn, which includes almost €510m brought in last year. It estimates that allowing landlords to claim the tax against their rental income would cost the Exchequer €36m in a full year. It cites other research that such an incentive would do little to encourage landlords “to stay in or enter the rental market”.

Incentives for developers

On the recent 10% in Stamp Duty tax imposed to stop investment funds buying up residential streets or whole housing estates, the tax group reports the tax was collected for 630 properties since its inception, and “the bulk acquisition of houses by investment funds will continue to be monitored by the Department of Finance”.

And on the Stamp Duty Refund Scheme designed to encourage homes to be built on land previously acquired for non-residential use, some €63m in tax has been returned relating to 5,235 claims, the group notes.

The tax group devotes almost three pages to assess a longstanding proposal by the construction industry to apply a reduced Vat rate of 9%, down from 13.5%, on a wide range of residential building services. It estimates the cost at €400m and also draws attention to other temporary Vat reductions, but without specifying the hospitality tax, saying there would be no guarantee the benefits would be passed on to house buyers.

Government housebuilding

And the tax group pointedly concludes: “As noted earlier, Housing for All has the largest ever housing budget in the history of the State, with in excess of €20bn in funding. It may be prudent, therefore, that non-tax measures, such as direct expenditure or regulation, be considered before the use of any further taxation measures in the residential property market.” Most experts agree with the officials.

John McCartney, head of research at BNP Paribas Real Estate, said that tax schemes for residential housing have proliferated with the risk that they benefit a small group of people.

Professor Kieran McQuinn of the ESRI: 'You have to ensure that speculation in land doesn’t drive up prices.'

Kieran McQuinn, research professor at the Economic and Social Research Institute, said that many taxation measures were just a way to influence the demand side of the market by making mortgages more affordable. The Government may likely need to revise its new home build targets following the new Census data showing the population continues to grow. 

“It you want to make inroads into the problem, you do need considerable Government investment, but in parallel, you have to ensure a process that looks at the underlying costs and that speculation in land doesn’t drive up prices,” Mr McQuinn said.

Michael Dowling, a leading mortgage expert, said incentives including Help to Buy and the First Home Scheme should be better targeted and the ceiling lowered below the current €500,000 qualifying price.

On incentives in general, Mr Dowling said that Government is under great political pressure over housing, “but there are questions about the massive money and whether it is going to the right people”. Some builders face viability challenges, but the questions about the significantly higher building costs in Ireland than elsewhere in Europe won’t go away, he said.

Lorcan Sirr, housing policy expert and senior lecturer at the Technological University Dublin, said many of the residential tax schemes are “as political as they are economic”. However, there is a consensus across the political spectrum that the State should build social housing, Mr Sirr said.

And Edgar Morgenroth, professor at the DCU Business School, said the Government needs to get building. “By not dealing with social housing, Government and local authorities are just making things worse”, he said, adding that planning may need to be stripped out of the local bodies and put into some sort of housing executive. 

“If the local authorities don’t want to build housing, then why should they be left with planning responsibilities,” Mr Morgenroth said.