Paschal Donohoe says increase in apartment output justifies tax breaks for REIT funds

Public Expenditure Minister credits institutional investors with the 'dramatic' rise in the number of apartments being built

Public Expenditure Minister Paschal Donohoe defended the REIT tax breaks, saying: '[T]he same programme exists in most of the countries that we compete with for foreign direct investment.' File picture: Damien Storan/PA

Controversial tax breaks for investment funds which run apartments were justified and are the reason so many apartments have been built, Public Expenditure Minister Paschal Donohoe has said.

Real Estate Investment Trusts (REITs) are companies that earn rental income from commercial or residential property. They were introduced by Fine Gael to help kickstart the then flat construction sector.

They are controversial as they are generally exempt from corporation tax (CT) on income from their property rental business only. They are also generally exempt from chargeable gains made on the disposal of assets of their property rental business only.

REITs are also exempt from income tax whereas private landlords pay a marginal rate of 51% including USC.

Such companies have been attacked by left-wing political parties who have called for their preferential treatment to be ended. The Government has seen fit to agree to REITs paying no income tax while at the same time denying private landlords a tax deduction for standard business expenses such as local property tax.

However, Mr Donohoe defended the tax breaks in an interview with the Irish Examiner. He said the number of apartments built here have 'dramatically" increased particularly in the last year:  

Institutional investors are the reason why that has happened. That's the reason why I do believe the REIT structure has played a role in housing output. 

Mr Donohoe said he changed the tax structure of certain funds because he was conscious of legitimate issues that were developing.

His comments come as Housing Minister Darragh O’Brien has expressed concern at the drop in investors in the build-to-rent sector, suggesting the State will have to step in to fill the gap.

Mr O’Brien did admit that there is mounting concern about the supply of new homes into next year as commencements are falling, according to industry figures.

“I'm confident about delivery this year," he said. "There is a gap next year and we need to get more commencements started this year."

He said “in particular, the investors to support build-to-rent have slowed down” and are “going elsewhere”.

One of the reasons for this is the increase in funding costs and interest rates as well. So that investment is going elsewhere. So we've got to step into that breach.

It comes as the government is now assessing options to incentivise small landlords to stay in the market in the next budget, including the deduction of local property tax against taxed income on rental properties, an exemption from PRSI or USC, a lower income tax rate, or an exemption from tax on the first €14,000 of rental income.

Finance Minister Michael McGrath has expressed support for the introduction of a significant package for small landlords in the next budget, signalling a u-turn on Mr Donohoe’s previous refusal to consider them.

Mr Donohoe has also defended his party's controversial tax breaks for high net-worth executives in the technology sector.

The special assignee relief programme (SARP) provides income tax relief for certain people who are assigned to work in Ireland from abroad and means those who get it pay a very low effective tax rate.

Mr Donohoe said the SARP programme “reflects the world that we live in”.

Every time I was making the justification for SARP, I used to point out how the same programme exists in most of the countries that we compete with for foreign direct investment. 

"So it's a recognition of the world as it is,” he said.

Sinn Féin’s Pearse Doherty has signalled a desire to scrap the tax break on equity grounds, saying high net worth people should pay their fair share of tax.