Section 11 Finance Act 2006 amended the computational rules in Section 97 TCA 1997 for determining the amount of rental income chargeable to tax. Entitlement to a deduction for interest paid on borrowed money employed in the purchase, improvement or repair of a rented residential property is now conditional on compliance with the registration requirements of the Residential Tenancies Act 2004 (the Act). The statutory basis for the registration of tenancies is contained in part 7 of the Act. This change applies to interest paid by individuals during the year of assessment 2006 and subsequent years and by companies for accounting periods beginning on or after 1 January 2006.
The establishment of the Private Residential Tenancies Board (PRTB), and other changes to residential landlord and tenant law in the Residential Tenancies Act 2004, arose out of recommendations of the Commission on the Private Rented Residential Sector. The PRTB was established in September 2004 to operate a national tenancy registration system, to provide information and policy advice on the private rented sector and to resolve disputes between landlords and tenants.
The Act applies to the vast majority of private rented dwellings situated in the State (dwellings outside the State are outside the scope of the Act). Section 3 of the Act lists the types of dwellings that are excluded and in respect of which there is no requirement to register tenancies. The main exclusions include:
- Business premises
- Former rent controlled dwellings occupied by the original tenant or by his/her spouse
- A dwelling let by a local authority or a voluntary housing body
- A dwelling occupied under a shared ownership lease
- A dwelling in which the landlord also resides (this would include the ‘rent a room’ scheme)
- A dwelling in which the spouse, parent or child of the landlord is resident and where there is no written lease or tenancy agreement
- Holiday lettings
A dwelling let by, or to, a public authority is also excluded. A “public authority” includes a recognised educational institution. Therefore, owners of student accommodation dwellings let to a third level college for onward letting to students are excluded from the requirement to register. However, tenancies in dwellings that are let directly to students must be registered.
Where an owner of a rental property leases that property to a management company and the management company then on-leases the property to, for example, students or tenants of nursing home residential units, the management company must register those tenancies. While failure by a management company to comply with its registration requirements will not have any consequences for the owner’s entitlement to an interest deduction, it will be an offence for the purposes of the Act. However, in a situation where an owner of a dwelling simply contracts with a management company to carry out certain management and letting services without actually leasing the property to that management company, the owner would be required to register tenancies for the dwelling.
The onus is on a landlord to ascertain whether he or she is excluded from the requirement to register tenancies. In this regard section 3 of the Act is relevant. Also, the PRTB has published guidance material on this issue.
Landlords are required to register details of all of their tenancies within one month of the commencement of those tenancies. Once a tenancy is registered it remains a registered tenancy for as long as the tenancy remains in existence. Once the tenancy is terminated, any new tenancy created in respect of the dwelling must be registered with the PRTB. Under the provisions of Part 4 of the Act, if the tenancy has not previously been terminated it will be deemed to be terminated when it has lasted 4 years and a new tenancy will then be deemed to commence. This new tenancy must be registered with the PRTB and the appropriate registration fee paid.
The registration application form PRTB1 is available from local authority Housing Sections or it can be downloaded from www.environ.ie
. Section 136 of the Act sets out the particulars that must be entered on the PRTB1. The PRTB may return an incorrectly completed or incomplete PRTB1 to a landlord and refuse to register a tenancy until the form has been correctly completed. Landlords are urged to read the ‘Frequently asked Questions’ section on the PRTB’s website, in particular the material on the tenant’s Personal Public Service Number (PPSN). The Act states that the PPSN of the tenant(s) must be provided unless it cannot be ascertained by reasonable enquiry. Where a landlord is unable to provide the required PPSN, he or she should send a covering letter to the PRTB with the PRTB1 setting out the reasons why the PPSN is not being provided and the steps that were taken to ascertain the number. Revenue understands that the PRTB takes the view that instances of tenants not having PPSNs or of being unable to obtain a PPSN should be very rare. The PRTB may refuse to register a tenancy if the PPSN is not provided.
As already stated, entitlement to a deduction for interest paid on borrowed money employed in the purchase, improvement or repair of a rented residential property is now conditional on compliance with the registration requirements of the PRTB. These registration requirements have been outlined above and must be met for all of a landlord’s tenancies.
The registration requirements must be complied with in respect of all tenancies in a particular dwelling in the chargeable period for which the interest deduction is claimed. There is no provision for apportionment where only some of the tenancies are registered. If a tenancy commences at some time within the last month of the chargeable period, the registration requirements will be regarded as met if the tenancy is registered within a month of commencement even though the month may finish in the next chargeable period.
Where a landlord is claiming an interest deduction under the normal self-assessment system, he or she will be required to state in the annual return of income that he or she has complied with the registration requirements. Evidence of registration need not be submitted with the return of income but should be retained for inspection in the event of an audit.
For Revenue audit purposes written confirmation of the registration of a tenancy from the PRTB will be accepted as evidence of compliance with the registration requirements for that tenancy. In the case of an exempt dwelling, the onus will be on the landlord to show that he/she is not required to comply with the registration requirements. Landlords claiming interest relief in respect of properties situated outside of the State must be able to show that the interest paid relates to that property.
If it is discovered that a landlord has failed to comply with the registration requirements for a chargeable period any interest relief that has been claimed will be withdrawn. Such a withdrawal of interest relief may result in an underpayment of tax and expose the landlord to interest and penalties.
Section 11 Finance Act 2006 also applies to the general countrywide rental refurbishment scheme. This scheme provides for a deduction against rental income for expenditure incurred on the refurbishment of rented residential accommodation. Qualifying refurbishment expenditure can be written-off over 7 years at the rate of 15% per annum for the first 6 years and 10% in year 7. In addition to any interest deduction that may be claimed, the entitlement to a deduction for the qualifying refurbishment expenditure is now dependent, inter alia, on compliance with the registration requirements of the PRTB. Therefore, the obligation to comply with the registration requirements of the PRTB is triggered whether or not a loan is taken out to finance the refurbishment. As outlined above, written confirmation of the registration of a tenancy from the PRTB will be accepted as evidence of compliance with the registration requirements for that tenancy where relief under this scheme is being claimed. Finally, the Finance Act 2006 provided for the termination of this scheme on 31 July 2008. Refurbishment expenditure incurred after that date will not qualify for relief.
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