Key Post Is allowing only 75% of interest against tax fair?

I know that the government have been doing this for the last few years, but does anybody have any legal view on this scenario ?

25% of mortgage interest not an allowable expense
NPPR not an allowable expense
Property Tax, will be phased in as an expense.


Is this legal, i mean obviously it must be if they are doing it, but can the government just change the rules over night to suit themselves all the time ?

And perhaps you weren't a landlord at the time, but they did away with interest relief COMPLETELY for a couple of years (late 90s IIRC), then did a u-turn and allowed it in full, helping to inflate the bubble that's got us into the mess we're now in.

TenantRef said:

I know that the government have been doing this for the last few years, but does anybody have any legal view on this scenario ?

25% of mortgage interest not an allowable expense
NPPR not an allowable expense
Property Tax, will be phased in as an expense.


Is this legal, i mean obviously it must be if they are doing it, but can the government just change the rules over night to suit themselves all the time ?

Click to expand...

It's legal. That's what a government is for to set taxes. They didn't back date anything so it's perfectly legit. But these costs and reduction in interest relief are making it an very difficult market for landlords, hence rent rises in Dublin I guess.

For NPPR, it is still not legally clear to me that this is not a legitimate business letting expense. But as pointed out by another post what landlord is going to challenge revenue's 'opinion' on this matter. Revenue can and do get things wrong and they can and do change their minds. For example they changed their mind a few years about about allowing 'term' life insurance on properties as an expense. Prior to this it was not allowed.

In relation to the soon to be property tax. Government is deciding on whether this will be tax deductable or not. The IPOA (Irish property owners association) are lobbying for this. Currently it's at the stage of being brought in on a 'phased' basis, which makes no sense whatsoever.

For water charges, I intend that my tenant's will pay this, as it's a utility like gas or esb. But if it's not metered I may do as I do currently for some bills like communal esb or bins, include it in the rent and deduct the cost as an expense on my tax returns.

mandelbrot said:

And perhaps you weren't a landlord at the time, but they did away with interest relief COMPLETELY for a couple of years (late 90s IIRC), then did a u-turn and allowed it in full, helping to inflate the bubble that's got us into the mess we're now in.

Click to expand...

That's a very peculiar reading of history. You're forgetting the massive surge in rents in the 1998-2001 period, fuelled by a dire shortage of rental properties caused by the implementation of the 1998 Bacon Report, that made goldmines of unmortgaged rental properties, and the widespread panic amongst tenants at the time that they literally wouldn't have a roof over their heads if they didn't accede to landlords' frequent demands for rent hikes. It was this artificial phenomenon that drove the post-2002 bubble.

T McGibney said:

That's a very peculiar reading of history. You're forgetting the massive surge in rents in the 1998-2001 period, fuelled by a dire shortage of rental properties caused by the implementation of the 1998 Bacon Report, that made goldmines of unmortgaged rental properties, and the widespread panic amongst tenants at the time that they literally wouldn't have a roof over their heads if they didn't accede to landlords' frequent demands for rent hikes. It was this artificial phenomenon that drove the post-2002 bubble.

Click to expand...

So is there nowhere in between 0% deductibility and 100% deductibility?! (Well there clearly is now, since we're at 75%.) They did a u-turn and caused another shock to the market, when they could have changed direction slightly.

The 0% deductibility never made any sense back in 1998. The 75% deductibility makes no sense now. Interest is an overhead like any other. It should be treated in the tax code like all other overheads. (So should property tax and water charges.) Politically-driven ad-hoc tinkering merely creates distortions in the market and random positive and negative consequences (largely unforeseen) for those directly and indirectly affected.

T McGibney said:

The 0% deductibility never made any sense back in 1998. The 75% deductibility makes no sense now. Interest is an overhead like any other. It should be treated in the tax code like all other overheads. (So should property tax and water charges.) Politically-driven ad-hoc tinkering merely creates distortions in the market and random positive and negative consequences (largely unforeseen) for those directly and indirectly affected.

Click to expand...

The problem with the full interest deduction though is that it did encourage otherwise uneconomic buy-to-let scenarios.

The way I see it, and of course feel free to correct me, you effectively had speculators getting involved in the market, able to acquire 100% (or greater!) finance, and willing to let at a histrically low yield, because all they were interested in was cashing in on capital appreciation over a fairly short time horizon.

If Govt policy had been to say it's irresponsible to excessively leverage the purchase of property i.e. debt/equity greater than 75%, so you will only get a deduction for that much of the interest you incur, it could have taken some of the steam out of the situation. It wouldn't have had to take retrospective effect i.e. people who had borrowed before X date, on the basis of a full deduction, would continue to get it, but any borrowings after X date would not get full deduction (Or something like that). This would not unfairly affect incumbents in the market, but would have affected the decisions of people ploughing in on what they thought was a dead cert.

mandelbrot said:

The way I see it, and of course feel free to correct me, you effectively had speculators getting involved in the market, able to acquire 100% (or greater!) finance, and willing to let at a histrically low yield, because ll they were interested in was cashing in on capital appreciation over a fairly short time horizon.

Click to expand...

That was the politicians' concern, and Peter Bacon's concern, but both forgot the plight of (mainly younger) tenants who wanted to rent rather than buy, and who were forced firstly into a rental bidding war as tenants and then into a second bidding war as reluctant buyers. Both phenomena fuelled property prices to unsustainable levels, in turn feeding the mania of the so-called property ladder and the mantra that 'only losers rent'.

It never occurred to anyone in authority, that with employment, inward migration, and incomes all rising sharply at the time, there was a real shortage of available rental accommodation and that it was utterly inappropriate within this context to attempt to use the tax system as a crude battering ram with which to enforce a desired, if illusory, outcome.

I fail to see the logic of how restricting interest deduction to 75% (let alone zero) would have been useful in alleviating the shortage of accommodation that gave rise in the first instance to the above scenario.

Of course we all now know the authorities' strategy of blaming so-called greedy landlords for their own planning mistakes led ultimately to disaster (despite plenty of warnings on AAM and elsewhere at the time) and sadly our grandchildren will yet pay for the consequences of this bungling.

T McGibney said:

That was the politicians' concern, and Peter Bacon's concern, but both forgot the plight of (mainly younger) tenants who wanted to rent instead of buying, and who were forced firstly into a rental bidding war as tenants and latterly into a second bidding war as reluctant buyers. Both phenomena fuelled property prices to unsustainable levels, in turn feeding the mania of the so-called property ladder and the mantra that 'only losers rent'.

We all know this didn't lead to a happy ending and sadly our grandchildren will yet pay for the consequences of this bungling.

Click to expand...

But that's only one side of the equation surely, and the other side is the supply, of houses and of finance - and that's where the banks' irresponsible lending comes in.

mandelbrot said:

But that's only one side of the equation surely, and the other side is the supply, of houses and of finance - and that's where the banks' irresponsible lending comes in.

Click to expand...

With respect, irresponsible lending wasn't an issue in 1998-2002. There was, however, a serious shortage of houses and apartments.

T McGibney said:

With respect, irresponsible lending wasn't an issue in 1998-2002. There was, however, a serious shortage of houses and apartments.

Click to expand...

Holy cow, I just looked at the house price index data for the periods from 1998 - 2002, and OK you win!

Q1 1198 index value 41.5
Q1 2002 index value 79.3

That's a 91% increase in nominal value, applying CPI inflation rates of 1.78%, 3.36%, 5.86% and 4.18% for years 1998-2001, that leaves "real" price increase of 64%...

I was in school / college at the time, so had zero awareness of it; I always thought that property prices only really kicked off from about 2001 onwards, but the increase from Q1 2002 - Q1 2006 was *only* 61% in nominal terms, about 43% in real terms.

My hypothesis in tatters I will now retreat to lick my wounds... (thanks for educating me TMcGibney)

However that's all a bit off topic - the OP's question was as to the legality of the 75% interest deduction, and the simple answer is it's entirely legal.

I do not wish to get into the little spat between the accountants but while I accept that Governments can make laws as they please to suit some of their little pet agendas provided that they are not unconstitutional . Surely there is something wrong with taxing money that you have already paid out. What textbook says that losses should be taxed.
The idea of doing this during probably the greatest property burst in this country is absolutely daft. Can anyone tell me any other business sector that only allows 75% of the interest as an expense. A genuine expense should be allowed in any business. If the Government want to screw a particular let them be upfront about and call it for what it is.

Thank you for clarifying

100% of interest for commercial property investors.

75%. Of interest for residential property investors.

Very inequitable treatment by Revenue/government. Is there any onus on a tax system to be fair?

I have no issue with the commercial properties as you have either a Case I or Case V Deduction so it fair enough both get 100%.

I actually think that the restriction on interest relief is to try to level the field between owner occupiers and investors.

The owner occupier gets TRS at a rate for a period of time. All things being equal the owner occupier has more tax to pay on their salary and then get a rebate for a period of time. The investor gets marginal rate relief on 75% of the interest. So the investor is always better off.

Perhaps the way to go would be to let owner occupiers get a marginal rate deduction on Mortgage interest, house insurance NPPR LPT ect and then pay CGT on the disposal of their PPR!! Maybe this should be in the "Rocking the Boat Section".

Joe 90 I respect your posts but in this case it is not about equity and it is all about Minister Burton's prejudice against lanlord's in the housing sector no matter how small they are.

Joe_90 said:

I actually think that the restriction on interest relief is to try to level the field between owner occupiers and investors.

The owner occupier gets TRS at a rate for a period of time. All things being equal the owner occupier has more tax to pay on their salary and then get a rebate for a period of time. The investor gets marginal rate relief on 75% of the interest. So the investor is always better off.

Click to expand...

The desire to "level the playing field between owner occupiers and investors" has formed the basis of govt policy for many years (incidentally, with ruinous consequences as I outlined above). However I consider it totally bogus.

A residence, to an owner occupier, is for private use & enjoyment. There is no basis on which to allow tax relief on this private use. (notwithstanding that the govt deems it worthy to offer limited mortgage interest to first time & recent buyers.)

A residence, to a landlord, is a business asset. As with the owner occupier, there is no basis on which to allow tax relief on any private use & enjoyment of the residence by the landlord.

However where, and to the extent which, the landlord generates income from their business asset, it is perfectly logical and acceptable that they qualify for an apppropriate tax deduction in respect of their overheads, including their interest overheads.

Eddie Hobbs summed it up well in "The Saturday Night Show"- 26th Jan in that Landlords are treated like vermin by the Fiscal Regime - hence all the investors are gone, and anyone with a few bob would do better leaving it sitting in the bank.
This leaves the property market to be lifted by Home Owners!!

T McGibney you are correct.
I often wondered if there was a cost benefit analysis done on the 25% portion of the interest not being allowed together with the NPPR and the other 100 euro charge not being allowed as an expense how many landlords have been shoved over the edge. The disposal of properties as a result by the banks will cost more than the state will benefit from it's discriminatory attitude towards landlords