The Bill which is before Seanad Éireann today contains the taxation aspects of the Government's package of measures on housing which was announced recently by my colleagues the Minister for the Environment and Local Government, Deputy Dempsey, and the Minister of State with responsibility for housing and urban renewal, Deputy Molloy. Senators will be aware that the background to the Government's package is the third study carried out by Peter Bacon and Associates, Economic Consultants.
The overall thrust of the Government's package, which includes this Bill, is to maximise housing output to meet the continuing strong demand for housing curb short-term speculative demand, strengthen the position of first time purchasers in the market, increase the supply of social and affordable housing to meet rising housing needs and improve the institutional arrangements to facilitate the delivery of housing related infrastructure and thereby increase overall housing supply.
The third Bacon report points out that further economic growth in the past two years together with falling interest rates in 1999 and inward migration have added to demand for housing. Demand has increased faster than was forecast two years ago. In the circumstances the report says that the supply of new homes needs to be boosted to 54,500 units per year in the private sector if equilibrium in the market is to be achieved. Last year the construction sector completed 46,500 new homes which was the third year of record output in the sector.
Increased supply must be the solution to the current imbalance in the housing sector, but housing supply just cannot be switched up to significantly higher levels of output, at least in the short run. To reach the higher level of output requires an integrated package of measures which is what the Government has set out. Taxation measures have a role to play in helping to deliver more houses more quickly where they are required. The Government has indicated that that aspect will be dealt with in future Finance Bills as part of the arrangements for special development zones. In the meantime the measures contained in this Finance Bill should help in applying resources in the home building sector to the construction of homes for people who want to secure a foothold in the market.
This Bill is mainly concerned with the demand side. The measures are designed to strengthen substantially the position of first time buyers and other owner occupiers in the housing market.
Senators will agree that it would be unacceptable if the goal of owning their own home were to be beyond the reach of large numbers of our young people. In particular we cannot allow a situation to develop where the current generation of young people cannot aspire to owning their own homes. Home ownership should be a factor for stability and contentment in the community not one that leads to frustration. As well as being of direct assistance to first time buyers and owner occupiers, the taxation measures in the Bill are also designed to curtail speculative or transitory demand which has been helping to drive up prices.
I will now outline for Senators the specific measures in this Bill. Part 1 deals with the new stamp duty measures for residential property. This will involve a three tiered rate structure for first time buyers, owner occupiers other than first time buyers and investors.
Section 2 deals with the commencement date of the new stamp duty measures. These measures apply to conveyances dated on or after 15 June 2000. However, the Bill contains transitional arrangements for pipeline cases which are disadvantaged under the new structure. As a result the pre-15 June rates will apply where a contract, as evidenced in writing, was in place before 15 June 2000 to purchase a residential property and the conveyance takes place on or before 31 January 2001.
Sections 3 and 4 specify the new stamp duty rates applying to residential property. This now means that residential property purchased by first time buyers up to £150,000 will be exempt while for other owner-occupiers properties up to £100,000 will also be exempt. First time buyers will benefit from a cut in stamp duty for second hand properties up to £300,000. Owner-occupiers will also gain from lower rates for houses up to £300,000. Significantly increased rates, however, will apply to investors in residential housing. A flat 9% stamp duty charge will apply to all categories of investors buying new or second hand residential property for conveyances executed on or after 15 June 2000.
Following changes in the Dáil, the Bill allows separated and divorced persons who have left the marital home to benefit from the first time buyer relief if they purchase a new home. To qualify the person concerned must not retain an ownership interest in the former home which is occupied by the former spouse. In addition the first time buyer relief is being made available for beneficiaries of tax designated trusts established for permanently incapacitated persons. Senators can get further details on these matters in the explanatory memorandum to the Bill. I emphasise that the fundamental aims of the changes to the stamp duty regime are to enhance the position of first time buyers in the market and to discourage speculative investment in the lower range of the market.
Part 2 of the Bill deals with the new anti-speculative property tax. This tax will apply to residential property in the State which is acquired on or after 15 June 2000 which is not an individual's principal private residence. This tax is a further measure aimed at discouraging speculative investment in the housing market which is causing difficulties for first time buyers in particular. It is not an anti-investor tax as such. It is essential that we have a vibrant, professionally run private rented sector, but we also need to discourage speculative investment. Exemptions will therefore be available in specific instances.
Section 5 is a definitions section. This section also provides that the tax will not apply in respect of qualifying residential investment properties under section 23 relief, under the following schemes – the Custom House Docks area scheme, the Temple Bar area scheme, the 1994 urban renewal scheme, the seaside resorts scheme, the islands scheme, the new urban renewal scheme, the rural renewal scheme, the scheme of residential accommodation for certain students, the rented residential accommodation element of the park and ride scheme and the town renewal scheme.
Senators will observe from the exemptions I have just listed that it is not intended to apply this new tax to properties that are being incentivised elsewhere in the tax code. To do so would be contradictory and illogical. Exemptions will also be provided for certain "heritage" type residential properties as well as registered and listed holiday homes. Landlords who comply with certain regulations made under the Housing (Miscellaneous Provision) Act, 1992, will not have to pay the tax. It is also envisaged that exemptions will be available in future for landlords who comply with the standards and requirements of a new regulatory regime to be put in place following consideration of the forthcoming report by the Commission on the Private Rented Sector. It can be seen that the exemption from this tax can act as an incentive towards the improvement of standards in the private rental sector which is a laudable objective.
Section 6 deals with the charge to the tax. The 2% rate will apply for a period of three years on the market value of all relevant residential property with effect from 6 April 2001.
Sections 7 to 13 outline further exemptions applying to this tax. Certain situations will not give rise to the anti-speculative property tax, such as the purchase of a residential property which will be an individual's principal private residence. However, where an individual changes principal private residence on or after 15 June, while retaining ownership of his or her previous residence, the latter property will come within the scope of the tax, even if owned before 15 June 2000.
The tax will not apply to residential properties received through inheritance or, in the case of gifts, if the property was owned by the donor before 15 June 2000. Similarly, residential property held in a discretionary trust prior to 15 June 2000 will not be liable to the tax. Residential property built after 14 June 2000 on land which was owned prior to this date will be exempt. The tax will not apply to residential property held by charities.
Mirroring the changes made to the stamp duty regime, the tax will not apply to any share in the family home still retained by a party to a marriage in respect of which a divorce decree or a judicial separation has been granted. I have also ensured that the tax will not apply to residential properties which are held by tax designated trusts established for permanently incapacitated persons.
As is the case with the stamp duty changes, there will be transitional provisions for individuals who had entered into contracts evidenced in writing before 15 June to buy a residential investment property. Section 14 provides that the tax will be charged on the market value of the property.
Sections 15 to 27 provide for the administrative aspects of the tax. It is a self-assessment tax which will last for three years. Those liable to the tax must make a return and pay the tax to the Revenue Commissioners on or before 1 November of each of the three years up to 2003, when this tax will apply. The tax due will be 2% of the market value of all non-exempt residential property owned by the person on 6 April each year. However, where the property was acquired and fully paid for between 15 June 2000 and 6 April 2001, the price paid is taken as the market value of the property on that date. Each person with an ownership interest is liable for the tax to the extent of his or her proportionate interest in the property.
Sections 28 and 29 contained in Part 3 of the Bill deal with the "care and management" provisions and relate to the short title of the Bill, respectively.
I assure the House that if the measures require fine tuning, for either the stamp duty or anti-speculative taxes, we can do this in next year's Finance Bill. These latest taxation measures on housing taken by the Government in this Finance Bill follow on from what we did in the Finance (No. 2) Act, 1998, and also in the Finance Act, 1999. On both occasions, the actions were on foot of recommendations made in reports commissioned from the Bacon consultancy. This demonstrates how active this Government has been to ensure that the taxation system, as well as other measures, is used to redress quickly imbalances in the housing market.
The effects of the previous measures have been positive. The most recent Bacon report concluded that the rates of increase in prices of both new and second hand houses have slowed sharply since the middle of 1998, which is the point when the Government measures to redress market imbalance were implemented.
Figures now to hand from my colleague, the Minister of State with responsibility for housing and urban renewal, show that average house prices generally have stabilised and, in some cases, have even been reduced since the last quarter of 1999. The Minister of State, Deputy Molloy, announced earlier this week that the March quarter figures for Dublin show reductions of 1.1% and 2.7% in the average prices for both new and second hand houses, respectively. This is the third quarter that average house prices have dropped nationally and in Dublin since 1995. Year on year house price increases for the period March 1999 to March 2000 are significantly lower than in previous quarters. Nationally, new and second hand house prices rose by 13% and 14% on the same period last year, the lowest increases since 1996. In Dublin, annual increases of 13% and 17% have been recorded which are also down on 12 month increases in December 1999.
There are grounds for optimism in these figures. The latest package, including the measures in this Bill, should assist in restoring balance in the market and curbing the price increases we have seen. This price moderation is in the interests of all in the property sector, whether first time buyers, owner-occupiers or investors.
I commend the Bill to the House.