Barra Roantree has raised this issue again recently and the Commission on Taxation recommended restricting the relief.
7.6.1.2 Principal Private Residence Relief
Recommendation
7.2 The Commission recommends that the Capital Gains Tax Principal Private Residence Relief should be restricted over time.
As is clear from the data set out in this chapter, property is the most significant form of wealth held by Irish households. Indeed, there is a striking disparity between the average wealth of those households who own a home, and those who do not, which is becoming an increasingly significant dividing line in Irish society (see Tables 6 and 12). As is discussed in Chapter 14 (Land and Property), however, the Commission strongly believes that the best way to tax land and property is through annual value-based taxes.
At the same time, the complete exclusion of Principal Private Residences (PPRs) from CGT is an anomaly. The taxation system currently provides that the disposal of a property, which was occupied by the taxpayer, or by a dependent relative of the taxpayer, as their sole or main residence, does not give rise to a chargeable gain. Partial relief may apply where the property was not fully occupied as a main residence throughout the period of ownership or where the sale price reflects development value. There is currently no limit to the house value or gain that can qualify for PPR Relief.
There is currently very limited data on the cost of PPR Relief as a tax expenditure. The total consideration reported in 2019 and 2020 for disposals of PPRs was €906 million and €837 million respectively. However, the current monetary value of CGT forgone is unknown, as
is the number of claimants and number of properties it has applied to. Such data gaps are unhelpful. Like all other tax expenditures, the cost of PPR Relief should be measured and subject to regular review so that tax policy can be developed on an informed basis.
The rationale for PPR Relief is to ensure that the sale of a house, which will generally be replaced with another house, can be done on a tax-neutral basis. The tax savings from PPR Relief generate more disposable funds for the next purchase of a PPR.
Property values have increased substantially over recent decades, and these increases have arbitrarily increased household wealth. Maintaining the exclusion of PPRs in its entirety means that a proportion of these gains and a source of household wealth will go untaxed indefinitely. The uncapped nature of the relief may also create an incentive for people to invest in owner-occupied housing assets in a way which, in the long run, increases house prices and reduces investment in economically-productive assets. On the other hand, removing the exemption in its entirety is also problematic, as it could create lock-in effects at a time when it is important to avoid further distortions in the housing sector.
The OECD has previously suggested that policymakers should explore the phasing out of some of the tax advantages that favour home ownership and that tend to benefit better-off households, including by imposing a limit on the value of owner-occupied housing that benefits from an exemption from taxation on capital gains. In a 2018 report, the OECD noted that higher income households are likely to purchase more expensive homes and have more of their savings directed towards owner-occupied housing, and that one way of mitigating the adverse distributional effects of an open-ended exemption on owner occupied housing would be to cap this benefit. The report suggests such a cap could be imposed at a relatively high level to ensure that only those properties, and the high end of the residential housing market, are affected.
The Commission has considered different mechanisms by which the PPR Relief could be curtailed. These include the imposition of a threshold based on the value of the property sold, or a cap on the relief based on the amount of the capital gain. However, given the disparity in house values across the country, it may be difficult to set one threshold that appropriately reflects regional differences, whereas
different thresholds depending on location may lead to other inequities. Another option would be to apply a lower rate of CGT to disposals of PPRs. The latter option may be more equitable given regional house value differences and at a minimum, would ensure a contribution to the State from all profitable disposals of houses, as opposed to a relatively high threshold which may not yield as much in revenue.
The Commission’s view is that, in the short term, the priority with regard to taxing PPRs should be to increase the yield from the LPT as outlined in Chapter 14 (Land and Property), and that PPR relief should be restricted over time, with the precise mechanism to achieve this requiring further consideration.
Recommendation
7.2 The Commission recommends that the Capital Gains Tax Principal Private Residence Relief should be restricted over time.
