Budget 2017: First-time buyers risk borrowing too much

There are fears house hunters will borrow more than need to qualify for relief, writes John O’Flynn
Budget 2017: First-time buyers risk borrowing too much

THE tax cuts in Budget 2017 amounted to approximately €500m. However, with the reduction in USC by 0.5% accounting for €335m of these tax cuts, Finance Minister Michael Noonan was very restricted in the tax reduction measures he could introduce.

Consequently he appears to have focused on specific areas namely housing, the self- employed, agriculture and fishing.

In the area of housing, the most interesting relief is the help-to-buy scheme which will give first-time buyers a rebate of income tax paid over the previous four years subject to a maximum of 5% of the purchase price of a new home up to a value of €400,000.

The purpose of this relief is to assist buyers satisfy the deposit requirement to be eligible for a mortgage under central bank rules. One of the conditions is that the applicant must take out a mortgage of at least 80% of the purchase price.

The concern is that this may encourage first-time buyers to borrow more than they require in order to qualify for the help-to-buy scheme. Surprisingly, this relief applies retrospectively as houses acquired by first-time buyers from July 19 this year will qualify.

Another welcome change is the decision to phase out the restriction of tax relief on interest incurred on borrowings for rental residential properties. The amount qualifying will increase from 75% to 80% in 2017 and will increase by instalments of 5% each year until a 100% deductible amount is restored.

Other housing measures introduced are the extension of the home renovation incentive scheme to the end of 2018, relaxation of certain conditions in relation to the living city initiative, extension of mortgage interest relief from 2017 to 2020 and an increase in the income ceiling from €12,000 to €14,000 under the rent-a-room scheme.

To narrow the tax differential between the self-employed and the employee, the earned income tax credit for the self-employed has been increased by €400 to €950. This still compares unfavourably to the PAYE allowance available to employees of €1,650.

Another disparity is the entry point of PRSI for the self-employed and employee. The self-employed have an entry point of €5,000 while employees do not pay PRSI until they earn over €18,000 per annum. This disparity should be amended to lessen the burden on start-up businesses.

A welcome amendment was the reduction in the CGT rate from 20% to 10% for disposals qualifying under the CGT entrepreneur relief of qualifying assets up to a limit of €1m. As the programme for government indicated that it was intended to increase the limit to €10m, it was disappointing that there was no increase in the limit this year. In his budget speech however, the minister has indicated that he would review the limit in future budgets.

A welcome announcement was the decision to introduce a new SME-focused, share-based, incentive scheme for employees in next year’s budget. This is most welcome as share-based remuneration has a significant role to play in attracting and retaining key talent in companies based in Ireland.

As it is SME focussed, this incentive may not be extended to multinational companies. At present some of the current share schemes in operation in Ireland are not working effectively and should be reconsidered in order to offer attractive, competitive alternatives.

The amendment to the foreign earnings deduction where the minimum number of days required to be spent abroad has been reduced from 40 to 30 is welcome and in particular it should benefit smaller businesses.

With lower world prices for food and the weakness in sterling, there was a clear focus on providing cash-flow assistance to farmers.

The most significant announcement was that a loan fund would be made available that would be low cost (below 3% per annum) and highly flexible.

Further cash-flow measures introduced were the provision of 100% capital allowances in year one for energy efficient equipment for sole traders and an opportunity to defer payment of income tax by opting out of income averaging for one year in special circumstances.

Farmers will also benefit from the increase in the Vat rate from 5.2% to 5.4% for non-registered farmers in 2017.

The fishermen also were singled out for special treatment with the introduction of a special €1,270 annual tax credit.

John O’Flynn is a tax partner with Deloitte

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