THE Department of Finance warned that the state would face legal challenges if it tried to withdraw a tax exemption that has been blamed for fuelling land hoarding.
The exemption, which allows land owners avoid capital gains tax if they hold onto a property for seven years, was introduced to kickstart the flagging Irish real estate market in 2011.
However, it has since had the unintended consequence of encouraging property owners to sit on land in the midst of a chronic housing shortage.
In a pre-budget submission for Finance Minister Paschal Donohoe, civil servants warned that any attempt to change the scheme would open the doors to compensation claims.
The submission said: â€œBased on legal advice, it will be necessary to retain the option for those who purchased property between 7 December 2011 and end December 2014 to retain the option to keep the property for the full seven years, and still enjoy the full â€¦ [tax] relief.
â€œThis is because property/land owners have legitimate expectation that the relief would stay in place for the time set out â€¦ and may have made investment decisions that could be impeded by a possible change in timing of the relief.â€
In Budget 2018, the exemption was changed so that property owners could instead sell the land after just four years and still get the full tax relief available.
The submission explained that there was no cost to the Exchequer from making the change as the tax loss had already been locked in.
It said: â€œThe costs of this relief have effectively already been incurred and the revenue from such gains foregone.â€
Minister Donohoe was presented with three options on how to reform the exemption.
The first possibility was to do nothing and just let the scheme run its course over the next three years.
â€œLand (and buildings) would continue to be held pending access to the relief,â€ the submission warned however.
â€œThere will be no marked increase in land being placed on the market until [2020-2021] â€¦ so potentially limiting the availability of development land.â€
The second option would have allowed property owners avail of the full tax relief either four or six years into the scheme.
The submission said: â€œThis option will â€¦ require the maintenance of the option to retain the property for seven years due to possible legal challenge.â€
It said that â€œanecdotallyâ€ a large amount of property had been bought at the end of 2013 and could therefore start becoming available for sale and development immediately.
The disadvantages of this approach included the potential for creating â€œa glutâ€ of land and buildings if owners began to sell en masse.
The submission also warned that property owners could just disregard the changes and hold onto land in â€œthe expectation of [further] price increasesâ€.
A third option was also proposed involving tiered relief depending on when the property or land was sold.
If sold after four years for instance, the owner would get 4/7ths of the relief or after six years, they would get 6/7ths.
In the end, Minister Donohoe opted for the second approach, which was to simply grant the relief at any time between four and seven years for property owners.
A spokesman said: â€œThis change could help encourage and promote the sale of assets such as development land and existing residential properties.
â€œIt is widely believed that this relief has been a factor in slowing the release of development land onto the market, as owners â€¦ may be waiting for the requisite seven-year ownership period to elapse before selling.â€