The government is considering raising stamp duty on the sale of commercial property to ward off the threat of another crippling economic collapse and boost the state’s coffers by tens of millions of euro.
Officials in the Department of Finance have drawn up proposals to hike the rate of stamp duty to prevent the commercial property market overheating and reduce the risk of damaging “boom-bust cycles” reemerging.
The commercial property sector is booming with 540,000 sq ft of Dublin real estate changing hands in 40 separate deals over the first three months of the year alone.
A total of €4.5 billion was invested in Irish commercial property last year while analysts expect up to €1 billion of investment sales to be completed over the second half of 2017.
In February, the International Monetary Fund (IMF) said the government should develop policies that reduced the possibility of another property bubble emerging.
Advertisement
“[The IMF] identified the mitigation of the scope for boom-bust cycles as integral to the policy challenges of completing the recovery and strengthening the resilience of the economy to shocks,” officials wrote in recently published tax strategy papers.
“Among their conclusions was the view that demand pressures in the commercial real estate market need to be closely monitored and policy tools activated if risks to financial stability emerge.”
The department’s strategy papers are published every year before the budget.
Officials identified an increase in stamp duty on commercial property as one way of avoiding another property crashes.
Stamp duty is levied at 1 per cent on the first €1 million of the value of a home and 2 per cent on the remainder.
Advertisement
On sales of commercial property, a 2 per cent rate is charged.
Philip O’Sullivan, the chief economist at Investec Ireland, said the proposed increase in stamp duty could act as a tool to “take the heat out of the market” if it begins to expand at a dangerously fast pace.
“It seems as if the idea is that they could use it as a lever or as a prudential tool - much like the Central Bank’s mortgage lending rules. If they did that they could take the froth out of the market and dampen demand across the sector.
“What has happened in the market over the past number of years is that there has been a strong supply response to a very strong demand for commercial property at the moment.
“The government didn’t have to get involved in the market during that period but a policy response like the one outlined in the tax documents could be used to take the heat out the market if investors were investing really heavily in the coming years - and on a less sound basis. It could be a means of lowering risks,” Mr O’Sullivan said.
Advertisement
Industry sources cast doubt on whether hiking stamp duty in such a way would effectively curtail growth in the sector or add significantly to the state’s coffers, however.
“I’m really at a bit of a loss as to what’s behind it. In the commercial market, the affordability of commercial property doesn’t really affect the boom-bust thing to any significant degree I don’t think. Rents might have an effect on the market alright but the purchase prices don’t necessarily, and affecting the purchase price by stamp duty won’t affect the end rent that people are paying,” one source said.
Stamp duty on commercial property brought in €255.92 million out of a total yield from the tax of €387.76 million last year.
The previous year a total of €301.09 million was collected by the state.
Department officials estimated that a 1 per cent increase in the rate of stamp duty on the sale of commercial property would bring in a further €100 million per year for the state.