Experts at leading tax company www.taxback.com have said that a Revenue ebrief last week may have brought some modicum of solace to struggling buy-to-let investors. With some banks having finally realised that recovery of all monies lent on many buy-to-let mortgages is unlikely, deals are being considered where the property is sold and an agreement is formed to write off a significant proportion of the balance. Borrowers had been wary of such deals with a potential 33% tax rate looming over them in respect of the taking of such a benefit. With the Revenue’s strong reputation for debt collection, it could have been a case of out of the frying pan into the fire.
According to Central Bank figures released late last year the proportion of buy-to-let mortgages in arrears at the end of 2012 rose to 18.9% from 17.9% at the end of September. A total of 28,421 buy-to-let mortgages were in arrears of over 90 days by the end of December last compared to 27,018 at the end of September. Taxback.com say that the Revenue ebrief clarifying the tax approach which will apply to qualifying debt forgiveness/restructuring cases will be welcomed by those facing such debt restructuring arrangements. However, the tax experts believe that we may expect Revenue to open audits and investigations in order to ensure that such arrangements are not orchestrated for the avoidance of tax.
According to Christine Keily, tax expert with www.taxback.com, “Under CAT legislation an individual is deemed to take a gift (and potentially generate a tax liability) where they receive a benefit unless they have paid full market value for that benefit. Furthermore, under CAT legislation, a person could be deemed to receive such a taxable benefit in circumstances whereby a debt is released.
So, the big question here was whether debt forgiveness by the banks would trigger such a tax liability? With so many people in financial difficulty, the prospect of replacing the chasing bank with the tougher Revenue Commissioners wasn’t going to assist in their financial recovery, and therefore, a solution needed to be found.
Last week’s ebrief provides that where such a debt is released by a financial institution for bona fide commercial reasons (i.e. where a financial institution enters into a debt restructuring, forgiveness or write-off arrangement with a customer), Revenue’s approach will be that the financial institution did not make a gift of any sort to the individual. This means that the individual would not acquire a CAT charge in respect of any such debt restructuring, forgiveness or write-off arrangement”.
Taxback.com say that this ruling will be welcomed by many struggling mortgage holders but advise that a word of caution is necessary however as the ebrief is clear in that the approach will only apply in the above-mentioned circumstances and would not apply in the event that any debt restructuring, forgiveness or write-off arrangement has been undertaken for the purposes of the avoidance of tax. Any such arrangements may therefore be subject to Revenue audit or enquiry.
Christine went on to say, “We believe that this update could apply to a significant number of individuals with buy-to-let properties that they must sell as they cannot afford the repayments and therefore must agree upon terms with the bank”.
An example of this in practice: An individual purchased an apartment for €300,000 in 2008, borrowing €250,000 on interest only terms, sells the apartment now with the banks consent for €140,000. The borrower agrees to pay an on-going payment of for example €500pm to the bank for the next 5-7 years and the bank writes off the balance (€80,000). A CAT liability will not arise as the bank decision was made for commercial reasons with no intention to provide a gift to the individual.