Cranes once again etch the skylines of Dublin and other major Irish cities which will no doubt flash brightly with Christmas lights in the coming weeks.

For some this will signify the start of the festive period, for others it will confirm the beginning of a new cycle in the Irish commercial property market.

Some may comment that tax policy and Irish property have had somewhat of a love/hate relationship over the past two decades.

With Budget 2015 due to be announced by Minister for Finance Michael Noonan on October 14th, it is timely to look at some recent property-related tax policy and consider whether we can expect additional policy in this area.

Capital allowances

Government policy from the mid-1980s to 2006 was targeted at incentivising construction in a whole array of non-residential buildings.

Tax reliefs were available in the form of capital allowances and double rent allowances in a period which saw an unprecedented level of construction nationwide. Many of these schemes were designed to allow passive investors to participate in the tax reliefs by holding an interest in the properties for their tax life, typically seven years.

The Finance Act 2012 introduced guillotine provisions for legacy property reliefs whereby, in broad terms, any unused tax reliefs will not be available to carry forward beyond January 1st, 2015.

While we have seen some very limited property-based tax reliefs introduced since 2006, such as the Living City Initiative, it is difficult to see the Government reintroduce some of the heavy duty property reliefs of the recent past in the short to medium term.

Pension-based property investment

While the concept of pension-based property investments is not a new phenomenon, both at a personal and corporate level, it has grown in popularity for two main reasons.

Firstly, investors were able to identify investment opportunities which represented good value in terms of yield, with the purchase price in many cases representing a mere fraction of the original build cost. Secondly, many investors did not have the financial means, apart from their pension fund, to complete such deals.

While it is difficult to predict what Budget 2015 will bring in terms of pension changes, if the status quo remains and marginal tax relief continues to be available for personal pension contributions, one would expect the appetite for the commercial property market to continue based on current rental yields.

Capital gains tax exemption

Mr Noonan, in his 2012 Budget speech, introduced a reduction in stamp duty to a flat 2 per cent for all non-residential property.

In addition to this, and probably of more significance, was the introduction of capital gains tax (CGT) relief, which provided that for properties purchased in the period to December 31st, 2013, and held for at least seven years, any gain attributable to that seven-year holding period would be relieved from CGT.

The Finance Act 2013 extended this relief to all properties purchased in the period to December 31st, 2014.

With some property investors taking the view that “the only way is up”, with regard to property values, this relief has certainly contributed to the level of activity in commercial property since its introduction.

Mr Noonan has, however, in recent days, signalled that the exemption will not be continued stating that, “I use tax breaks to get a particular economic or social response in the short term, but I will not have it embedded as a permanent feature of the tax code”.

REITs

Since their introduction we have seen several REITs such as Green REIT and

Hibernian

REIT acquire significant Dublin-based commercial portfolios, with the result that the ownership profile of Irish commercial property has been radically altered. While the number of REITs introduced has been limited, the quantum of the portfolios they have assembled has been considerable.

Finance Act 2013 saw the introduction of a substantial new body of legislation into Irish law, providing a framework for real estate investment trusts (REITs). In his budget speech, Mr Noonan commented that “demand for high-quality large office spaces has strengthened in 2012. In order to attract new investment, I will provide for the establishment of real estate investment trusts, which allow for investors to finance property investment in a risk-diversified manner”.

REITs originated in the US in the 1960s and are now well established there and in Europe and Asia. Prior to REITs , investment in property, via commercial vehicles, was not generally a tax-efficient option, due to the double layer of taxation that applies to profits earned in a company and then paid out to shareholders. REITs were specifically designed to remove this double layer of taxation by providing an exemption from tax to the REIT, subject to meeting certain requirements including a minimal annual distribution.

Budget 2015

As we look to Budget 2015, the overriding question is whether tax policy has done its part to create a functioning property market and is fit for purpose. With an unprecedented level of commercial property being purchased in Ireland in the past few years, our Exchequer returns will certainly have experienced an increase in stamp duty and other transactional tax receipts, but is further change required?

With some analysts predicting a shortage in commercial property in the short to medium term, our legislators may now be considering some form of incentives to encourage further development. We await Budget 2015 with keen interest. Niall Cogan is a senior manager in PwC’s real estate group