Development land has always been subject to special capital gains tax rules. The rules are more restrictive than in the case of other assets.
The thinking behind this approach is that development windfalls are linked to the decisions of private authorities rather than intrinsic improvement of the land.
Development land is any land whose price does not reflect its current use value. It also includes shares that derive most of the value from such land.
The current use value is the value of the land on the assumption that no planning permission would be granted for change of use. See our chapters on the concept of the change of use under planning law. Where any part of the value is due to the “hope” of obtaining planning permission for different use then there is deemed to be development land.
The rules may be difficult to apply in practice. Most land may be said to have a certain element of hope or expectation value . In practice the rules will apply where there is reasonably clear hope or prospective value.
Special rules apply where the market value exceeds the “current use value”.
- Indexation was not available other than in relation to the CUV;
- The rates were higher than the standard
- Principal private residence relief may not be available;
- Relief for losses is limited
- Companies gains ringfenced
Losses & PPR Restricted
Capital gains losses generally are not available against development land gains. Only losses on development land may be offset against development land gains.
The exemption from capital gains tax on the disposal of principal private residences does not apply in respect development lands.
There is an exemption where the disposals of development land in a year are less than €19,050. This refers to the sale price, not the gains.
The history of treatment of development land gains in Ireland has been little short of extraordinary. In the 1980s to the late 1990s the tax rates for development land gains were higher than the ordinary rate.
In 1999 a standard rate of 20% tax applied to all capital gains. Relief went further and the 20% rate was extended to income tax so that trading gains in residential land were almost the only form of income subject to special low income tax rate of 20%.
A windfall gains profit applied to certain development gains at the rate of 80% for a period after the financial crisis of 2008. This was subsequently abolished.
Finance Act 2013 increased the general rate of capital gains tax to 33%. Disposal of development land are now also taxed at the 33% rate.
Former Windfall Tax
The 80% tax rate applies to gains arising from rezoning. Rezoning comprises the change of zoning under the planning authority’s development plan. See our section on planning permission.
The 80% rate applies to both profits and gains if they arise from land rezoning. This does not apply to other development activities such as construction.
The windfall gains are the gains resulting from the increase in market value applicable to rezoning or a planning permission in contravention of the zoning.
Windfall gains were those that result from an increase in the value of the land attributable to a rezoning. The rate applies to the lower of the actual gain or the windfall gains. The windfall gain was that attributable due to the rezoning.
In the case of companies the capital gains tax on development land is entirely separate from corporation tax with the result that could it stands entirely alone. The rules apply both to land to shares deriving their value from land. The provisions only apply to land in the State.