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The important question property tax: CGT or income tax?

Welcome to Query Of The Week

Welcome to this week’s Query Of The Week. Each week our technical team respond to a huge number of client queries and in this segment, we share with you the most common questions that keep coming up time and time again.

In this week’s Query Of The Week, John Murphy discusses the important question of property tax, is it classified as capital gains or income tax?

We hope you enjoy this week’s, Query Of The Week.

Property Transactions & Tax

If this Query Of The Week was of interest to you, you will also be interested in our Property Transactions & Tax webinar.

Full details for this online CPD course can be found below:

Webinar Duration 1 Hour
Fee €25
Presenter John Murphy – OmniPro
Category Financial Reporting

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

Hello and welcome to this week’s query of the week. So this query relates to property and tax, this is one that just came in there a couple of days ago.

Effectively the question or the scenario that was put was effectively whereby the individual had purchased a number of undeveloped houses, I suppose in 2013. Now at this point in time they’re thinking of disposing of this, as part of it there was a small, there was a small plot of land which was purchased for very little, to do with the area around the estate that had been purchased, also there was some land purchased as part of it, so the question came in, what do we need to think about from a property and tax perspective in here?

So obviously the first thing you’d look and see, what I always look in relation to property is, if we dispose of it, can we get out of  CGT because of the seven year exemption in Section 604A, so because this was bought in 2013, let’s say, in that particular example,  that’s within the window between 2011 and December 2014 so we potentially have a Section 604A relief if it’s deemed to be CGT because we got it in that window.

The next thing that we had to look for, in this example here the person had moved in and they were living in one of these houses, they’d done them up and they were living in it. If Section 604A didn’t apply well then this Section 604 property plan, for principal private residence relief apply?

That was the next question. In order to answer that part of the question we had to look and see, what was the intention, look for Section 604, the case law’s always said, what is the intention of the individual? Is the intention to live there as a permanent home? If the intention is always to live there as a permanent home, then you should be able to get PPR on it if you can prove that fact. But in this particular query, this person moved into this house and he was potentially going to move into the next house later on so because he’s never really had the intention of staying here, well there was a risk if he or she was to claim, principal private residence relief then it might not be given because the intention wasn’t there in the first place, because that’s a key thing, that your intention is to stay there.

Then dealing with the other houses which had been done up in the meantime, during that time can they get Section 604A seven-year exemption?

The risk that had to be identified here was that these were undeveloped houses, the person involved had done up the houses during that period of time. So we had to assess, for those, was a trade actually being carried on in the first place? And if a trade was carried on, well then you’re not into CGT, you’re not even into Section 604A exemption at all.

Effectively you had to go back to the client, in this particular case and ask them, what were the intentions in relation to this? You’re looking at the badges of trade for these, when it was taken, what did the loan agreement say? Was the loan agreement for a short period of time which would indicate that you’re trading, what was the motive for it? Does this person that’s bought this, is he usually involved in the buying and selling and developing housing, if he is well could be potentially pushing down, an income tax route in relation to that.

There are a lot of intricacies that you have to look at when you’re looking at housing.  You can’t automatically say yeah that’s CGT, you have to look and see, well look in this example, are the badges of trade met or are they not, is it a trade or is it not? If it’s not a trade well then you’re into Section 604A, if it is a trade well then you’re into income tax potential which is obviously not where you want to be. But you have to be able to prove that it wasn’t a trade.

The other question we would have asked,  does this person have a history of holding onto and holding for investment properties from the get go, if that is there, it will help that, well it’s not a trade, they’ve always had this and they always, maintain them as investments or not, they’re dealing in developing land. It is an area that, it’s a gray area so you have to look at all the facts and circumstances in order to determine one or the other, so I suppose, you know the questions go back to the client to see, well look, can we prove it, if it’s a company, what minutes were there? Those sort of things that can prove, well our intention was in this example, to always be investment, not trading.

The other one in relation to the lands, the lands and the small element to the side of the estate,  that was a separate dilemma, because remember the Section 643 of the Tax Consolidation Act effectively tries to tax any transaction in relation to land as income tax, where the intention was always there to sell.  That was a real risk that they had to be aware of,  was the intention always to sell? If the intention was always to sell then Revenue can pretend, well this here is an income tax transaction and therefore, again for those elements Section 604A seven year exemption doesn’t apply, so as a result, you cannot, that person potentially could not claim the 604A exemptions and instead they potentially could be liable to income tax.

The key things is you need to look at the facts and circumstances here  looking at what were the intentions at the time? What’s the evidence of the intentions? How was it funded, what does the person usually do? Does he buy and sell and develop land regularly? Or does he do a bit of both and has proven that he holds some as investments as well.

Property tax is an area that you have to look at facts and circumstances just to make sure that you come in with the relief first of all and if you don’t come in with the relief, well assessing why that is, let’s say badges of trade in my example.

Hopefully you found this useful, if you’re interested in property and tax areas, we’re doing a webinar on the sixth of November, so if you’re interested, please log on, thank you.