Budget 2005

Feargal O'Rourke
Feargal O'Rourke is a Tax and Legal partner in PricewaterhouseCoopers and is a member of their Irish leadership team.
He acts for a number of public, private and multinational corporate clients and is also regularly involved in advising on large tax and non tax based property transactions.
He can be contacted via e mail at feargal.orourke@ie.pwc.com

December 2004

Budget 2005 : Implications for Private Investors

In case you missed it, there was a Budget the other day! While that may be a little facetious, there is no doubt that recent Budgets, as far as the reader of this publication is concerned , are very much a case of "so what".

While not exactly the night before Christmas, there was a time when tax advisors would almost lie awake before Budget Day wondering what goodies (or otherwise) the Minister was going to pull from his hat. However nowadays "tax excitement" over the Budget is rarely the order of the day.

Part of the reason for this is that for the first time in decades there is a definite sense that tax rates, which are the central building blocks of the tax system, have reached a level of stability which looks likely to last for a while.

• The standard rate of VAT has been 21% since 1991 (with the exception of 14 months in 2001/02)
• The last change in Capital Gains Tax was 1997 and Gift / Inheritance Tax was 1999
• The last announced change in Corporation Tax was 1997
• The last decrease in a personal rate of tax was 2001
• The last increase in the top rate of tax (from 60 to 65%!!) was 1983
• No increases in any tax in the Budget - first time since 1978

It's not just that the good times may have come to an end for top rate tax taxpayers, but the comments from the Minister on tax reliefs (repeated somewhat more forcibly by the Taoiseach and Tainaste) may have sent a shiver through some peoples' hearts!

However it is worth reflecting on those comments as, paradoxically, I think there is a lot of good news for top rate taxpayers contained therein. Announcing a review of tax reliefs generally the Minister stated that "for the successful operation of such schemes and to achieve the common good, we need to ensure the right balance is achieved between the benefit to the investor and the good of the community". He also went on to say "I have no problem in maintaining justifiable reliefs and extending them, where appropriate".

When one went wading through the fine print, there was a surprise as a significant number of reliefs which the Minister was referring to were due to expire in any event in July 2006. His predecessor had spent two Budgets trying to close off such reliefs generally while in a couple of sentences his successor , while not exactly raising them from the dead, was certainly putting the resuscitation pads on them!

The reliefs to which the Minister referred covered the whole gamut of property based incentives from urban town and rural renewal reliefs, park and ride and car park facilities, private hospitals, nursing homes, sports clinics, childcare facilities, holiday homes, student accommodation and third level buildings. All of these had offered generous tax reliefs to investors over the years but all are due to expire in any event. On the activities side, woodlands, stallions, greyhounds and artists, all of which have various forms of exemption from tax will also be coming under the microscope.

What is going to happen now? Well in the first instance, the Department of Finance will see a level of lobbying, the likes of which it has not seen in a very long time as every vested interest tries to make the case as to why their relief is "special". The outcome is that while many of these reliefs will be allowed to expire some of the more "worthy" ones will be retained and the ability of taxpayers to shelter some element of income tax will be continued. This notion of some reliefs continuing would have been laughed at this time last year.

There is no doubt though that a new tax regime will apply to these reliefs which will eliminate any possibility of taxpayers sheltering all or a substantial part of their income from tax (increasingly remote these days in any event as a lot of the older reliefs facilitating such a result had expired). What I expect to see for those property based incentives which are continued is some limitation on the quantum of allowances that can be claimed in any one year and a requirement to leave a certain percentage of total income or rents liable to income tax.

In relation to the activity based reliefs like stallions and artists, one could see a situation arising where a portion of such income continues to be exempt to cover the smaller player but some element of taxation is likely. Trying to ensure that all taxpayers pay a minimum acceptable level of tax is a change in Government policy but, if we are honest, not a surprising one.

All will be revealed this time next year when the Minister stands up on Budget Day, so perhaps a bit of excitement to look forward to. Watch this space!