I INTRODUCTION TO THE LEGAL FRAMEWORK
The legal system in Ireland has three pillars – common law, a constitution, and statute passed by the Irish Parliament (known as the Oireachtas). Statute based law is typically split with primary legislation passed by the Oireachtas and secondary legislation passed by authorised bodies including the Property Registration Authority. Irish real estate law is governed by all three.
The enactment of the Land and Conveyancing Law Reform Act 2009 helped modernise and simplify the laws in relation to property ownership in Ireland. Other important pieces of legislation in the sector are the Residential Tenancies Act 2004 (as amended) and the Landlord and Tenant Acts 1967 – 1994. Real estate law has been further shaped by case law, and the Irish courts can be influenced by the position taken in the UK courts.
In Ireland, a property owner can hold either a freehold or a leasehold interest in a property – which is quite similar to other jurisdictions, particularly the United Kingdom. To own the freehold interest in a property means the property is owned outright. While certain covenants and conditions can attach to the freehold interest, it will not be subject to a rent or a term of years. The only exception to this rule is when dealing with old fee farm grants or lease for lives renewable forever, which are seen as freehold-equivalent title but may have a ground rent included in its terms.
To have a leasehold interest in property means that land is owned for a specific term, subject to payment of rent and other conditions. Leasehold title is categorised further between long-term, commercial and residential leases.
A long-term lease is usually for a period in excess of 250 years and will include a nominal rent, and no overly onerous covenants and conditions. Long leases that meet these requirements are often referred to as 'freehold equivalent' leases as the lessor has no real prospect of recovering the property once the lease expires. Historically one could encounter long leases in respect of both residential and commercial properties. However, the law no longer permits any party to grant a long lease of a residential property unless it is in a multistorey development of apartments. For commercial property transactions, a long lease is typically only granted where there is a managed estate that incorporates a service charge and management obligation on the parties.
Occupational leases are used by property owners who let investment properties to occupational tenants. The term of these leases is negotiable, and terms for a period of between five and 25 years are usual. The rent is typically market (but may also be linked to the consumer price index or tenant turnover), with rent reviews and extensive covenants and conditions to ensure the property is returned in good order and repair. Depending on the nature of the property concerned, the occupational lease will establish a service charge regime and a method of recovery of a service charge on the delivery of certain services by the landlord.
Short term residential leases are those granted by investors to short term tenants of investment residential properties. The law around these lettings changed significantly in July 2019 (discussed further in Section II of this chapter) and reflects the current focus on the private rental sector in Ireland.
There are two registration systems in place for recording property transactions in Ireland, namely the Registry of Deeds and the Land Registry. Both systems are controlled and managed by the Property Registration Authority (the PRA). The Registry of Deeds records date back to 1708 and is the traditional method of registration in Ireland. It is in the process of being replaced by the more modern methods introduced by the Land Registry (following a transfer of title). While both systems continue to operate, it is now compulsory to register all title in the Land Registry, and it is hoped that in time this will be the sole record of property transactions and ownership. The Property Registration Authority reports that 93 per cent of the land in Ireland is now registered in the Land Registry.2
The Registry of Deeds deals with 'unregistered' title or title which has not completed the first registration process in the Land Registry. The system works on the basis of priority, whereby deeds that have been registered have legal priority over unregistered deeds or deeds registered at a later date. Completing registration in the Registry of Deeds does not provide any guarantee of title to the land but failure to register can lead to a loss of priority.
The Land Registry deals with all title that has gone through the Land Registry first registration process where title to the property is investigated and verified. Once registered, the property is given a unique number known as a Land Registry Folio which will record the physical and legal description of the property, the registered owner, the nature of the interest held (for example, freehold or leasehold), details of any third party rights or encumbrances that affect the property (also known as 'burdens') and a map identifying the property. Title registered in the Land Registry is state-guaranteed.
In addition to the above, the following registers also affect (and benefit) real estate in Ireland:
- the Commercial Leases Register: Any tenant who takes a commercial lease of a property is statutorily required to record the main terms of the lease on this register. This is a public register maintained by the Property Services Regulatory Authority (PSRA);
- the Residential Property Price Register: This register records the price and address of all residential properties purchased in Ireland since 1 January 2010. It is maintained by the PSRA;
- the Residential Tenancy Register: The landlord is statutorily required to register a tenancy with the Residential Tenancies Board;
- the Vacant Sites Register: Introduced in January 2017, each local authority is responsible for maintaining a register of all vacant sites within their catchment area. The register will note the owner, title to the property and the market value. Subject to conditions, if the site meets the requirements and remains vacant an annual levy of 7 per cent (previously 3 per cent) of the market value is payable by the owner; and
- the Derelict Sites Register: This register is maintained by the local authority and records properties where buildings are left in a derelict, dangerous or objectionable condition. The authority can demand the property owner to restore the property or can apply a financial penalty of 3 per cent of the market value.
Irish real estate law, like most real estate law, is very country specific and real estate documents are typically governed by Irish law. From an enforcement perspective, Irish lawyers can provide clients with more certainty if documents are Irish law governed.
II OVERVIEW OF REAL ESTATE ACTIVITY
Over the past number of years, the Irish economy has seen strong growth, a thriving construction industry and continued commitment of international and domestic investment. This can be seen with the increase of planning applications for office, student accommodation and buy-to-rent schemes year on year.3 The flourishing tech sector accounted for much of the uptake to date with many of the larger tech companies opening their EMEA headquarters in Dublin. There was also competition for space from the burgeoning coworking sector, which has both domestic and global service providers. It will be interesting to see how this area continues to perform with WeWork growth coming to a halt.
The student accommodation sector has taken off in the last 24 months with new purpose-built student accommodation (PBSA) developments completed. There are now 6,691 PBSA bed spaces available and a further 5,986 under construction. Under the national student accommodation strategy issued by the Irish government, there is still room for growth with the Irish Government setting a target of 28,000 PBSA beds by 2024.
One of the key trends in Dublin over the last 12 months is build-to-rent (BTR) schemes. BTR schemes comprise purpose-built rental accommodation designed for the long term residential rental market and professionally owned and managed by institutional landlords. The combination of high rents, high property prices and strict Central Bank rules on borrowing have created the perfect conditions for the establishment of BTR schemes. Investors are attracted to the BTR model as it provides stable and secure real estate asset that does not suffer from the cyclical nature of the more traditional office and retail sectors. They have also identified Ireland as a prime location for these schemes with an estimated €7 billion reportedly ear marked for investment in the coming years.4
The Irish government is in many ways facilitating the expansion in this area. The vacant site levy was introduced to encourage property owners to bring vacant sites back to the market, the Strategic Housing Development Regulations allows developers to fast track large scale housing developments of 100 units or more and the Urban Development and Building Heights Guidelines have lifted the restrictions on building heights allowing for high-density residential developments in urban areas. In addition, stamp duty was increased from 6 per cent to 7.5 per cent in 2019 on commercial premises, but there is a refund scheme in place where residential developments are constructed on non-residential land. The enactment of the Residential Tenancies (Amendment) (No. 2) Act 2019 strengthens residential tenant rights and protections, but the government has avoided introducing any long-term rent controls or rent freeze that might act as a deterrent to BTR investors.
The prolonged uncertainty caused by Brexit and the slowdown in European economic growth has had an impact on the market particularly in the last quarter of 2019 where activity in the construction sector fell for a second period in a row.5 The 2020 'Emerging Trends in Real Estate'6 recorded that international and European political instability together with environmental and sustainability issues are key concerns for investors looking into 2020. While Ireland is in some ways a beneficiary of Brexit, it will be difficult to quantify what opportunities were missed on account of the prolonged uncertainty and what the lasting effect will be on the economy at large.
The main domestic banks continue to sell off non-performing loans in the face of continued pressure from the European Central Bank to reduce their exposure to those loans and with a view to releasing more debt into the market. Most recently, Allied Irish Banks, plc sold a portfolio of underperforming investment property loans with a book value of €850 million to a consortium led by Everyday Finance for €700 million and Ulster Bank a portfolio of home loans and buy-to-let properties worth around €800 million to CarVal Investors. Development finance activity in the main domestic banks continues to increase with a particular focus on the Dublin office and co-living sectors.
The non-bank lending sector is becoming increasingly competitive with new entrants seeking to fill the gap left by domestic banks. HBFI is one of the latest entrants, with a focus on financing the construction of new homes in the state. Other recent entrants including RELM, Cullaun Capital and Activate Capital, have a wider focus, offering a range of short- to medium-term finance for residential and commercial investment and development finance at slightly higher rates than the traditional lenders but with a more streamlined approval process and documents package.
III FOREIGN INVESTMENT
There are no direct restrictions on foreign ownership of Irish real estate. On condition that the investor or purchaser is not on a UN or EU sanctions list and all anti-money laundering requirements have been met, non-Irish investors can own property in Ireland.
Inward investment is an area that Ireland actively promotes as evidenced by the success of IDA Ireland, the non-commercial, semi-state body that seeks to increase foreign direct investment into Ireland.
Ireland is seen as being politically and economically stable by investors with a strong labour market and access to the EU market and trade agreements. It has a wide network of tax treaties with over 70 countries and a low corporation tax rate of 12.5 per cent.
Post Brexit, Ireland will be the only English-speaking common law jurisdiction in the EU. As the current Chief Justice of Ireland opined, 'in all the uncertainty which currently surrounds Brexit … Ireland can provide, not least for those outside the EU in the common law world, a safe haven. In a time of great uncertainty, I would like to think that that safe haven may prove to be a significant advantage.'7
IV STRUCTURING THE INVESTMENT
The vehicles most commonly used are:
- corporate vehicles;
- unit trusts;
- qualifying investor alternative investment funds (QIAIFs);
- real estate investment trusts (REITS); and
- limited partnerships.
i Corporate vehicle
Investment in Irish real estate is very commonly made through a non-Irish-resident company. Rental income is subject to Irish income tax at 20 per cent, compared to 25 per cent for an Irish-resident company. An Irish rent collection agent is generally appointed to avoid tenant withholding in respect of Irish income tax.
Deductions are available for certain expenses incurred in connection with Irish real estate. Where loans are advanced to fund the purchase, improvement or repair of Irish properties, commercial rate interest payable on the loan should be a deductible expense in computing the taxable income provided the requisite qualifying conditions are satisfied. Interest paid on loans may be subject to Irish withholding tax if the loans are secured on Irish real estate but exemptions are available for certain non-resident lenders.
Any gain realised on the sale of Irish real estate is subject to Irish capital gains tax (CGT) at a rate of 33 per cent regardless of the residence of the person making the disposal. The charge to Irish CGT also extends to a gain realised on the sale of unquoted shares in a company that derive more than 50 per cent of their value from Irish real estate regardless of the tax residence or jurisdiction of incorporation of the target company, subject in certain limited cases to relief under a double taxation agreement. A CGT withholding procedure applies to purchasers of Irish real estate where the consideration exceeds €500,000 in the case of Irish non-residential property, or exceeds €1 million in the case of Irish residential property. The procedure requires the purchaser to withhold 15 per cent of the consideration and pay it to the Irish Revenue unless the seller produces a CGT clearance certificate (CG50A). A CG50A is a standard deliverable from the seller as part of the property acquisition or conveyancing process. A seller who is resident in Ireland can obtain a CG50A on application to Irish Revenue. A seller who is not resident in Ireland must generally pay any CGT liability arising on the disposal in order for a CG50A to be obtained.
Irish stamp duty applies on the acquisition of Irish residential property at the rate of 1 per cent on the first €1 million and 2 per cent on the excess over €1 million. The duty is calculated on the higher of the market value of the property or the consideration paid. Non-residential property is subject to stamp duty at the rate of 7.5 per cent. The sale of shares in an Irish incorporated company is subject to stamp duty at 1 per cent, and no Irish stamp duty should apply on the sale of the shares in a non-Irish incorporated company. However anti-avoidance provisions, which look to the circumstances surrounding the acquisition of the property and how the property has been held by the company, can subject a transfer of shares in an Irish or non-Irish land-rich company to stamp duty at up to 7.5 per cent.
Irish alternative investment funds are typically established under the 'Qualifying Investor' Alternative Investment Fund or 'QIAIF' regime. QIAIFs are regulated funds that are targeted at sophisticated and institutional investors. A QIAIF can be established as an Irish collective asset-management vehicle (ICAV), which has been the vehicle of choice for large scale property holdings in Ireland in recent years; however, the introduction of tax anti-avoidance legislation targeting Irish real estate funds (IREFs) is reducing its popularity. An IREF is an investment undertaking (such as an ICAV), or sub-fund of an investment undertaking, in which 25 per cent or more of the value of the assets at the end of the immediately preceding accounting period is derived directly or indirectly from Irish real estate and related assets, or where it would be reasonable to consider that the main purpose or one of the main purposes of the investment undertaking, or sub-fund, was to acquire such assets or carry on an Irish real estate business.
While a QIAIF is generally exempt from tax on income and gains and does not need to apply withholding or exit taxes on distributions or payments to non-Irish-resident investors, an IREF is required to account for IREF withholding tax on distributions of Irish real estate profits in favour of its shareholders unless an exemption applies. The current rate of IREF withholding tax is 20 per cent. Changes to the IREF tax regime have been introduced pursuant to Ireland's Budget 2020 and Finance Act 2019. The impact of the tax changes coupled with a change in approach of the Central Bank of Ireland to new IREFs and the associated regulatory obligations and compliance costs of an Irish regulated fund may make the QIAIF a less favourable and sustainable long term Irish real estate investment vehicle.
Provided certain conditions and tests are satisfied as to diversification, leverage restrictions and income distribution, a REIT is not subject to Irish tax on the income or gains of its property rental business.
A REIT is required to distribute to its shareholders (by way of dividend), on or before the filing date of the REIT's tax return for the accounting period in question, at least 85 per cent of the property income of the property rental business arising in each accounting period (provided it has sufficient distributable reserves). Dividends paid by a REIT from its property rental business are subject to dividend withholding tax (DWT) (25 per cent from 1 January 2020), subject to certain exceptions. Changes to the REIT tax regime have been introduced pursuant to Ireland's Budget 2020 and Finance Act 2019 that mean that distributions comprising the proceeds of property disposals may now also be subject to DWT. A REIT must apply DWT to distributions to non-Irish-resident investors whether or not an investor is resident in a double tax treaty jurisdiction.
The sale of shares in a REIT is subject to stamp duty at 1 per cent unless anti-avoidance provisions, which look to the circumstances surrounding the acquisition of the property and how the property has been held by the REIT, subject the transfer to stamp duty at up to 7.5 per cent.
iv Limited partnership
An Irish limited partnership established pursuant to the Limited Partnerships Act 1907 is sometimes used to hold Irish real estate as part of a larger investment structure. A limited partnership is transparent from a tax perspective and must consist of at least one general partner (who manages the business and has unlimited liability) and one limited partner. The transfer of partnership interests is subject to Irish stamp duty at 7.5 per cent.
V REAL ESTATE OWNERSHIP
Planning laws in Ireland are in principal similar to the laws in other jurisdictions. In order to build a new structure, planning permission – a planning permit – is required.8 Planning permission is granted subject to conditions, and these conditions must be complied with and must be certified or signed off at the end of a build by an architect or another suitably qualified professional. Planning policy is overseen by the Department of Housing, Planning and Local Government; however, the local authorities implement local policy and decide on planning applications on a day-to-day basis. An Bord Pleanala (ABP) (the planning board) was also established as an appeals board, and anyone can appeal a local authority decision to the ABP. The ABPs remit has expanded further in recent years, and applications can be made to it directly if they are for strategic housing developments (100+ houses or 200+ beds) or strategic infrastructure developments.
The local authority also deals with any applications for a change of use of a property and for ensuring that protected structures or structures with a historical importance are kept and maintained.
In addition to obtaining and abiding by planning permissions for a development, the developer and property owner must also meet the requirements set out by the Building Control Amendment Regulations 2014. These regulations introduced a more comprehensive method of monitoring and certifying construction projects for fire safety, disability access and building methods.
The Environmental Protection Agency (EPA) is an independent public body established to oversee environmental protection and policing. It has a statutory footing under the Environmental Protection Agency Act 1992, and wider EU law is also applicable. The EPA issues licences for larger sites where the risk of contamination is higher, for example waste facilities, petrol stations, intensive agriculture and waste facilities. When issued, these licences will have a number of conditions attached, and it will be a matter for the property owner to ensure that the requirements are met throughout the life of the licence. These requirements can include continued monitoring and reporting. Failure to comply usually results in a monetary penalty, the EPA's costs and in serious matters prosecution.
Where investors are looking to buy land or a site for development, it is now advised that they undertake a contaminated land site investigation as part of their usual property surveys. Historically this was not usually done and may only have arisen during the planning permission application. Where contaminated land is found, the remediation works can be substantial.
VAT on property transactions is a complex area and varies depending on the type of property being purchased. The current standard VAT rate is 23 per cent. For new build residential properties bought from the developer, a rate of 13.5 per cent applies. The majority of second hand residential property sales are VAT-exempt. Expert VAT advice is typically sought and obtained by those buying and selling property in Ireland, and the VAT approach varies depending on the nature of the property and the history of development.
Stamp duty is a tax that is payable when a property is transferred whether by sale or lease. The rates vary depending on the nature of the document (sale or lease) and the use of the property. The rates often change year on year in the Finance Act. The rate for commercial freehold or long leasehold property is 7.5 per cent from 9 October 2019. Stamp Duty on residential property up to €1 million is 1 per cent and any amount over €1 million is charged at 2 per cent. Stamp duty is payable on an occupational lease for less than 35 years at a rate of 1 per cent of the annual rent.
The Local Property Tax (LPT) was introduced in 2013 and is a self-assessed annual tax charged on the market value of residential properties. It does not apply to commercial property. The Revenue office has the power to collect the amount due directly from salary or attachment to the defaulter's bank account if unpaid. A solicitor will not complete a transaction without evidence that the amount has been paid. The LPT replaced an earlier household charge and non-principal private residence charge that no longer apply, but evidence of payment of these charges are still required.
Regardless of the applicable tax, when buying, selling or leasing a property in Ireland, it will be necessary to obtain an Irish tax number in order to discharge property taxes.
iv Finance and security
If a purchaser is taking finance to acquire property, the lender will typically take a fixed charge over the property itself and, if the purchasing entity is a company, a floating charge over the company's assets.
A fixed charge attaches to a particular asset, in this case the property, and prevents the owner of the property from dealing with the property without first obtaining the lender's consent. The fixed charge is typically registered in the Land Registry (registered land) or the Registry of Deeds (unregistered land) and shows up as a burden registered against the property.
A floating charge is a charge over a company's assets and particular assets are not always named. Accordingly, while the floating charge can be used in an enforcement situation, it will first need to be crystallised and registered against the property in the Land Registry before the property can be sold.
VI LEASES OF BUSINESS PREMISES
A business may prefer to lease commercial real estate rather than buy it outright. Commercial leases in Ireland are similar to other jurisdictions in that they are freely negotiable. The reality may be that the parties come to the table with varying degrees of bargaining power. Timing and demand may also mean that there is not much scope for negotiation. Currently, in Dublin at least, there is a shortage of office space, which automatically favours a landlord. In theory, however, in approaching lease negotiations, a business will seek tenant concessions, for example, rent free periods, fit-out allowances and break options, and try to get the best deal possible for the business.
A lease is prepared by lawyers on the basis of heads of terms that are generated by real estate agents. The term of a commercial lease typically ranges between five and 25 years with rent reviews normally occurring every five years. Regardless of the term, a commercial lease will generally have similar tenant requirements when it comes to repair, alienation rights, alteration rights, and forfeiture and break clauses. The longer the lease, the more onerous the obligations a tenant can expect.
In cases where the premises being leased forms part of a larger development, the tenant will typically contribute to a service charge and block insurance policy. These contributions are payable to either a landlord directly, or to a management company that insures the development and maintains the common areas. In these developments, the landlord will retain the main structure of the building and remain responsible for its upkeep with the tenant taking responsibility for the non-structural elements of the property being let.
The advantage of a lease is that it gives a tenant an entitlement to remain in a property for a defined period of time. This may not be for everyone though – a business may find it outgrows the space ahead of projections and is tied to the lease obligations. Likewise, a business may not take off as expected, and so the owners may wish to downsize (though it may be possible to sublet the space or assign the lease to a third party).
It is important to bear in mind that there will be costs to a business in exiting a lease – from the point of view of dilapidations. It is important to consider these costs at the commencement of the term, with a view to minimising exposure as much as possible in lease negotiations.
An alternative short term option is to take a licence of a space for one or two years. A licence is a mere permission given by a property owner to a company or individual to enter and use the property, but it does not give the licensee an interest in the property. Accordingly, the licensor retains full control of how the property is used and can request that the licensee relocate or vacate the property at any time, although in most cases some form of notice period is agreed. A licence will not contain the same onerous covenants as a lease will and will not require the same levels of commitment; however, as it is generally revocable by the property owner, it will deprive a business of certainty and security, which might not always work for a business model.
VII DEVELOPMENTS IN PRACTICE
i Law Society of Ireland Contract for Sale 2019
The Law Society of Ireland Contract for Sale is used by the parties buying or selling property and govern the terms of the agreement reached. The contract is split between bespoke special conditions that apply to the particular property and general conditions that remain the same (unless amended by a special condition) in every contract and provide a fair and balanced approach between the parties. The general conditions cover title, planning, identity, condition and usually include warranties and representations on the part of the seller to ensure they are providing relevant information that the seller has knowledge of.
In 2019, the Law Society of Ireland updated the General Conditions so that they are more in line with current trends by ensuring that the purchaser completes a full investigation of title prior to entry into binding contracts. The purchaser must be fully satisfied that all queries and concerns have been answered in advance of contracts being signed (except in very limited cases). This brings certainty that both sides are aware of any issues before contracts are signed and, it is hoped, will avoid any delay post-contract when additional issues may arise.
This approach has been used for some time by solicitors acting in larger commercial property transactions or receiver sales and purchases; however, with the change to the General Conditions it now makes this process a requirement for all property transactions going forward.
ii Residential Tenancies (Amendment) Act 2019
There has been an increased focus on investment in the private rental market with build-to-rent schemes and student accommodation being key trends. This has brought the law surrounding residential lettings into focus. With the introduction of the Residential Tenancies (Amendment) Act 2019 (the Act), the government has strengthened the original legislation dealing with this area, the Residential Tenancies Act 2004 and provided further certainty to tenants. The Residential Tenancies Board (the board responsible for observing and enforcing the legislation) has also been given wider powers.
The main points addressed in the Act are:
- rent pressure zones (RPZs) – a form of rent control that restricts any increase in rent to 4 per cent per annum in certain urban areas. RPZs were first introduced in 2016 as a temporary measure but have now been extended to 2021;
- notice periods – the required notice period that a landlord must give a tenant has been increased. The amount of notice depends on the amount of time the tenant has been in occupation, for example a tenant in occupation for between one and three years now gets 120 days notice, and between three and seven years that is 180 days;
- terminating a tenancy – if a tenant has been in occupation for over six months, there are six grounds on which the landlord can terminate the tenancy. The conditions tied to these grounds have been strengthened and are more onerous on the landlord;
- annual registration – landlords will have to register the tenancy on an annual basis; and
- short term lettings – 'the AirBnB amendment', the 2019 Act puts on a statutory footing the fact that in order to use an investment property in a RPZ on a short term let basis – meaning for periods not exceeding 14 days – an application must be made by the owner to the local authority seeking planning permission for change of use.
While the changes may not come as a surprise to institutional landlords, for new entrants into the market the changes will have an effect on how they envisaged running their new scheme. Developers, funders and investors should all be aware of how the law in this area has evolved.
iii Planning Height Restrictions
Historically, Ireland has been a 'low rise' country with height caps in place in urban areas. The Dublin City Development Plan 2016–2022 sought to regulate height restrictions in inner city Dublin. However, the homelessness crisis coupled with our growing population has forced the government to address this area. In December 2018, the Department of Housing, Planning and Local Government took its first step with the publication of the Urban Development and Building Heights Guidelines (the Guidelines). The Guidelines seek to change the current development patterns for urban areas with a call for developments of at least six storeys as the new 'default objective'. Local authorities will have to be cognisant of any specific planning policy requirements of the Guidelines in carrying out their functions and the Guidelines will take precedence over any conflicting policies and objectives of development plans, local area plans and strategic development zone planning schemes. While there has not been a dramatic increase in applications for high-rise buildings because of the Guidelines, it certainly opens the door for further change and higher developments in the future.
iv Budget 2020 and Finance Act 2019 – Stamp Duty increase and anti-avoidance measures
Stamp duty on non-residential property was unexpectedly increased from 6 per cent to 7.5 per cent with effect from 9 October 2019. In 2017, stamp duty was charged at 2 per cent of the consideration paid for or value of the non-residential property. The increase was roundly criticised by those in the property industry, and it is expected to have an effect on international investment into Ireland.
A number of anti-avoidance measures were introduced in Ireland's Budget 2020 and Finance Act 2019 with respect to the IREF tax regime. New restrictions on interest expenses in an IREF are based on debt-to-property costs and on an income to interest ratio. The provisions do not prevent excessive leverage or non-related expenses from being incurred by an IREF, but rather operate to impose a 20 per cent income tax charge at IREF level to combat their use in reducing profits which would otherwise be subject to IREF withholding tax on distribution from the IREF. The Finance Bill 2019 included a proposal whereby the amount of any distribution or redemption payment in favour of a person (other than certain EU/EEA exempt persons) who holds 10 per cent of more of the shares in an IREF (termed a 'holder of excessive rights') would be treated as income of the IREF and subject to Irish income tax at the rate of 20 per cent at IREF level. This provision was to apply from 1 January 2020. However, the provision was removed during the Committee stages of the Finance Bill due to concerns that the provision as currently drafted would unintentionally result in an additional layer of tax and would remove the current ability for some investors to claim double tax relief in their home jurisdiction. It is possible that the Department of Finance and the Irish Revenue may seek in due course to reintroduce a similar type of provision.
A number of amendments were also made to the REIT framework to ensure that the appropriate level of tax is being collected, notably in the area of capital gains. The distribution of proceeds from the disposal by a REIT of a rental property after 8 October 2019 will be subject to DWT. In addition, where the full proceeds from the disposal are not within 24 months of the disposal (1) reinvested in new property; (2) reinvested in the development or enhancement of other properties held by the REIT; or (3) distributed to shareholders, the REIT is subject to 25 per cent tax on 85 per cent of the proceeds not reinvested or distributed. An existing provision whereby a deemed disposal and rebasing of property values occurs should a company cease to be a REIT will only apply where the REIT has been in operation for a minimum of 15 years.
v Project Ireland 2040
This is the Irish government's long-term planning and investment policy on how the country should develop and grow. The document covers a wide array of areas, but of interest here is its plans for housing, infrastructure, education, climate and competition.
The proposal estimates that the population will grow by one million by 2040. To meet this, the proposal calls for an additional 500,000 homes through building, releasing state owned land banks and additional funding with €1 billion proposed for rural regeneration and €2 billion for urban. It also hopes to introduce additional student accommodation as part of this plan.
The transport infrastructure is set for an overhaul with a new runway at Dublin airport, investment in regional airports, new motorways and improvements to regional roads. In Dublin, the long-awaited underground is to be built and improvements and extensions to be made to the Luas (tram), the Dart (urban train), the bus routes and the main ports.
Climate action forms a major part of the policy and is encompassed in every aspect of the plan. A new €500 million fund is earmarked for climate action, and an emphasis is put on getting our electricity from renewable sources and increasing the number of zero-emission cars.
It is an ambitious plan that hopes to take a collaborative approach between the public and the private sector in order to deliver on its proposals.
VIII OUTLOOK AND CONCLUSIONS
Real estate in Ireland is expected to continue in its growth trajectory in 2020. The focus is expected to be on buy to rent and private rental schemes with social housing also very much a live issue and one expected to dominate the political agenda in what is now an election year. Other developments are expected in the area of inward investment in light of Revenue briefings in late 2019, which may result in some restructuring of real estate funds. With the growth of online sales, we expect to see continued growth in logistics and warehousing with Amazon announcing (in 2019) its intention to open its first distribution centre in Ireland, and others will in all likelihood follow suit. We will continue to monitor the Brexit negotiations and the impact Brexit might have in the context of the availability of finance, and the Brexit movers who will be competing for the new office space being produced in Dublin and the regions.
1 Rachel Rodgers is a partner, Robert Upton is an associate, Aisling Burke is a partner and Ronan McNabb is of counsel at Walkers.
3 CSO Planning Permissions Statistical Release 16 September 2019 – Planning Permissions.
4 Irish Times Article by Charlie Taylor dated 4 April 2019 https://www.irishtimes.com/business/commercial-property/institutional-capital-of-7bn-chasing-build-to-rent-assets-1.3849313?mode=sample&auth-failed=1&pw-origin=https%3A%2F%2Fwww.irishtimes.com%2Fbusiness%2Fcommercial-property%2Finstitutional-capital-of-7bn-chasing-build-to-rent-assets-1.3849313.
5 Ulster Bank Construction PMI Report October 2019.
6 Emerging Trends in Real Estate, Climate of Change, Europe 2020 produced by PWC and the Urban Land Institute.
8 The relevant legislation governing this are in Ireland is the Local Government (Planning and Development) Acts 1963–1999 and the Planning and Development Acts 2000–2017.