I move: "That the Bill be now read a Second Time."
This is the second Finance Bill which I am introducing to the House as Minister for Finance. While I did not expect to be before the House again so soon with taxation legislation, I think everyone will agree that the recent Government action in response to developments in the housing sector was required. Consequently, the measures contained in this Bill are necessary to ensure that a balance is restored to this market and that more importantly, the sharp increase in house prices can be addressed and defused.
Before dealing with the specific provisions of the Bill — the legislative consequences of the Government's action — I wish to briefly reiterate the rationale behind the Government's response to the recent trend in house prices. This response has not been ad hoc. It is a well thought out and integrated package of measures, from which we cannot afford to pick and choose. Each of the elements has a part to play in achieving the balance we are seeking.
The rapid escalation in house prices over the past few years has had serious adverse implications for first time buyers. Furthermore, excessive house price increases carry potentially serious implications for the wider economy in terms of possible inflationary effects and the dangers of excessive personal borrowing. It was necessary, therefore, for the Government to take action in this area and a comprehensive range of measures in relation to the housing market was announced on 23 April 1998 on foot of the economic assessment of the recent house prices developments.
I remind the House that late last year, the Government commissioned a comprehensive study of housing. The report on the developments in house prices by Peter Bacon and Associates has provided us with an independent, expert analysis of the situation, which has become a matter of serious public concern. Furthermore, this report provides a sound platform on which to formulate a balanced, well targeted package of measures to address this critical issue.
There are two priorities the Government must address regarding housing. First, the question of affordability of housing, especially for lower income groups needed to be addressed. I have said previously that this Government is not prepared to countenance the possible development of a situation where the goal of home ownership might be pushed beyond the reach of a significant proportion of households who reasonably aspire to it. Second, the long-term strength, stability and balance of the housing sector must not be jeopardised by excessive overheating or distortions in the market of which recent price developments are symptomatic.
The consultants' report has given clear recognition to these priorities and the Government's package will help restore balance to the housing market. This package will also help to remove another significant factor that has been fuelling price escalation — the expectation or, depending on one's perspective, fear of further major price increases. The publication of the report itself, with the Government's speedy response, will help take much of the heat out of the market. Furthermore, it is hoped that this package will restore a degree of parity between the various market participants, the owner-occupier and the investor.
The Government has formulated a selected range of actions designed to alleviate these pressures, on both the demand and supply side, which are identified in the report as causing overheating, bottlenecks or distortions in the housing market. The Government's response consists broadly of a three-pronged approach. First, measures to increase the potential supply of housing which involves increasing the availability of serviced land by the removal of infrastructural constraints, promoting increased densities at appropriate locations, encouraging faster release of serviced land for residential development and achieving better movement within the existing housing stock. Second, measures to dampen excessive investor demand and thereby help restore better balance between supply and demand and third, measures to improve the position of prospective first time buyers.
I now turn to the specific taxation measures contained in the Bill. It is usual on Second Stage to give a run through of the main sections contained in the Bill. Given that the Bill is short and deals specifically with the issue of housing, I propose to outline briefly each section even though the explanatory memorandum gives a more detailed description of individual sections.
Section 1 gives effect to the changes in the treatment of interest on borrowings used to purchase, improve or repair rented residential property. The consultants recommended the removal of the deductibility of interest on borrowings for residential property against rental income for tax purposes. The Government has accepted this recommendation. Accordingly, investors will no longer be entitled to a deduction for tax purposes against rental income in respect of interest on borrowings used on or after 23 April 1998 to purchase, improve or repair residential property. This measure, which will apply to individuals, partnerships and companies, will directly address the situation identified in the report that investors were, to some extent, replacing first time buyers in the market — a development which goes against the thrust of housing policy objectives accepted in recent decades. As is only reasonable, however, pipeline cases have been catered for, where a contract in writing was in place before 23 April 1998 to purchase an investment residential property and the borrowed money is employed for that purpose by 31 December 1998, instead of 30 September 1998 as announced in the Government statement of 23 April.
Neither will the restriction apply to borrowed money employed on the improvement or repair of a residential premises which on 23 April 1998 or at any time in the 12 months to that date was a rented residential premises and which was owned by the investor on 23 April 1998 or which was purchased by him or her on or before 31 December 1998 under a contract in writing entered into before 23 April 1998.
The disallowance of interest will not apply to rented residential properties covered by the provisions of the designated seaside resorts scheme or the new rural renewal scheme. Neither will it apply to holiday cottages or holiday apartments in other parts of the country, registered or listed with Bord Fáilte, where the planning permission specifically states that the premises are not to be rented or leased for periods in excess of two consecutive calender months at any one time. This latter exclusion will, however, only apply to developments where planning applications were received by the planning authority prior to 23 April 1998.
The section also clarifies that Irish investors who invest in residential property outside the State will also be subject to the new restrictions on interest deductibility. Thus such investment outside and within the State will be treated in the same way. In the case of rented residential property outside the State the restriction will not, however, apply where a contract in writing was in place before 7 May 1998, the date of publication of the Bill, to purchase the property and the borrowed money is employed for that purpose by 31 December 1998.
Section 1 also provides that where, at any time on or after 23 April 1998, a person turns their sole or main residence into rented accommodation, the restriction on relief for interest will apply from the date of the change of use, irrespective of when the borrowed money was employed. This measure is included to prevent people buying a house moving into that house and retaining their original house for letting purposes. To have allowed that situation would have run counter to the thrust of these measures, that is, to restore some balance in the housing market between investor and owner-occupier. These arrangements are fair and reasonable in the circumstances.
Section 2 is an anti-avoidance measure designed to prevent the circumvention of the measures in section 1 by channelling the borrowed moneys through a company or partnership. If this situation had not been catered for, a person could have obtained tax relief on interest on the borrowed money invested in the company or partnership which he or she could then invest in rented residential property.
Section 3 implements the Government decision to introduce a temporary reduction in the rate of capital gains tax on development land from 40 per cent to 20 per cent for disposals of serviced land zoned for residential use which are made between 23 April 1998 and 5 April 2002. The consultants recommended that, to encourage the supply of serviced land zoned residential, such a measure was required. The consultants were not specific in their definition of what should constitute serviced land and, consequently, I have decided to link the 20 per cent rate to the planning process. This is a transparent way of implementing the Government decision.
To qualify for this temporary reduction in the CGT rate on a disposal of development land, planning permission for residential development on the land must have been acquired prior to the disposal and such permission must still be in force at the time of disposal. Furthermore, if the contract for sale of the land which has planning permission for residential development is conditional on planning permission other than for residential development being obtained, this temporary reduction in the rate of CGT will not apply.
This section also provides for a new 60 per cent rate of CGT to apply from 6 April 2002 to disposals made from that date of development land zoned residential. This is in accordance with the recommendations contained in the consultants' report and will act as a further incentive to the early release of land suitable for residential development, thereby increasing supply.
Part 2 of the Bill contains the stamp duty provisions of the Government package. The House has had an opportunity to discuss these measures as they were contained in the Financial Resolution passed by the Dáil on 28 April 1998 subject to one change in the case of pipeline cases. I will outline briefly the changes in the stamp duty code.
Section 4 is a definitions section. Section 5 provides that the reduced rates of stamp duty on residential property and the imposition of stamp duty on all new residential property bought by non-owner occupiers will apply to all conveyances which take place on or after 23 April 1998. Pipeline cases have been catered for where written contracts had been entered into prior to 23 April 1998 and the conveyance takes place by 31 December 1998. This is an extension of three months on the 30 September 1998 period specified in the Financial Resolution. Where these transitional arrangements apply, the existing stamp duty relief on new residential property will continue to apply to investors.
Section 6 and the Schedule impose the new rates of stamp duty for residential property. These new rates are as follows: residential property valued at up to and including £60,000 is exempt; in excess of £60,000 but not exceeding £100,000, 3 per cent; in excess of £100,000 but not exceeding £170,000, 4 per cent; in excess of £170,000 but not exceeding £250,000, 5 per cent; in excess of £250,000 but not exceeding £500,000, 7 per cent; and in excess of £500,000, 9 per cent.
Section 7 deals with the transfer of mixed property, that is, property which has a residential and a non-residential element. In such cases, the Bill provides for the imposition of stamp duty as if it were two separate properties. In other words, the residential element will be chargeable to stamp duty at the new residential rates and the non-residential element of the transaction will be chargeable to stamp duty at the appropriate non-residential stamp duty rates. In this situation there will be no aggregation between the two rates. Sections 8 and 9 provide for the apportionment of the consideration on a just and reasonable basis in the case of mixed properties.
Section 10 provides that the existing stamp duty exemption for new housing not exceeding 125 square metres is restricted to owner-occupiers. In other words, if the purchaser does not intend to reside in the property and that property is not his or her only or main place of residence, stamp duty will apply at the appropriate residential rate.
Sections 11 and 13 deal with larger new housing units. If the purchaser is an owner-occupier, the existing treatment of levying duty on either the site cost or on 25 per cent of the aggregate cost of the site plus the building cost, whichever is the greater, will continue. If the purchaser is not an owner-occupier, stamp duty at the appropriate rate on the full amount of the transaction will be charged.
Section 12 is a technical matter dealing with mixed property and specifies that all details of how the consideration is to be apportioned must be supplied to Revenue. Sections 14 and 15, contained in Part 3, deal with the "care and management" provisions and relate to the Short Title, respectively.
The Government has acted in a decisive and considered manner. While criticisms have been made, inside and outside the House, about certain aspects of its response, the measures contained in the Bill are an appropriate response by Government and must be viewed with the other measures being taken as an overall package. The suggestion that building activity will cease because of these measure is unfounded. I have taken heart from recent media reports of sales of properties to owner-occupiers where in previous schemes a significant percentage of sales were made to investors. This is evidence that there is sufficient demand for housing from those who wish to purchase as an owner-occupier. To suggest otherwise is to miss the point of the detailed analysis contained in the consultants' report.
I look forward to an interesting and good debate on this important measure which I am pleased to commend to the House.