Due to the growing backlog of unsold homes in many parts of the country, developers are attempting to gain prospective buyers’ attention by more innovative means. This has resulted in new schemes or initiatives being made available which are designed to make the purchase of a home more financially attractive or viable to buyers. 

One such incentive being offered by developers is the “Rent to Buy” scheme.  These schemes allow prospective buyers to live in the house for a trial period before deciding whether or not to purchase the property. 

Under the scheme the buyer enters into a contract with the developer to purchase a property at an agreed date in the future (usually three years) at current market prices. Under the contract, the buyer pays a deposit towards the purchase price, which is generally not refundable in the event that the sale does not go ahead. At the same time as the contract, the buyer also enters a letting agreement with the developer and pays rent at normal rates for the agreed period. After this time, the buyer can opt (although they are not obliged) to buy the property at the pre-agreed price. A portion of the rent (often up to 100%) is also credited towards the price thus acting as a saving mechanism for the 3-year period for prospective purchasers.   

As this is a relatively new concept in Ireland, Revenue recently issued guidance on the tax treatment of these schemes. Revenue has indicated that each case needs to be considered on its own facts and circumstances but that generally speaking, the following tax considerations will apply in a “Rent to Buy” scheme:

• VAT
• In general terms, unless refundable, the initial payment of a deposit is subject to VAT at 13.5%. 
• Where market value rent is paid, no VAT should be chargeable on the rents. 
• On the letting of the property, the developer will be required to make a repayment of the VAT the developer recovered on the acquisition and development of the property for each year of the letting. If, for example, the property is let for 3 years, the total VAT to be repaid to Revenue is 3/20th of the VAT recovered on the acquisition and development (1/20th to be paid annually for each year of the letting). These schemes therefore result in a VAT clawback for developers of VAT previously reclaimed from Revenue. From a developer’s perspective, the VAT impact is effectively the same whether the developer decides to rent out the property or enter a “Rent to Buy” scheme with a buyer. 
• If, at the end of the letting agreement, the buyer exercises the right to buy, VAT is charged on the sale price (net of any deductions or discounts applicable) at 13.5%.
• Stamp Duty
• Where the buyer occupies the property and subsequently purchases that property, Revenue have said that the property will still be regarded as “new” for the purpose of stamp duty relief that applies on the purchase of a new house/apartment.