The potential benefit to first-time buyers of an income tax refund scheme announced by the Government could be offset if the plan serves to drive up the price of homes and land, Department of Finance officials warned.
Their concerns about the so-called "Help to Buy" scheme are outlined in documents released to The Irish Times under the Freedom of Information Act.
Further documents reveal Minister for Finance Michael Noonan "outlined his tax proposal for the Help to Buy scheme which he would be announcing in the forthcoming budget" to the Construction Industry Federation (CIF) two weeks before the Budget.
The CIF had consistently advocated for such a scheme but favoured a different approach to Mr Noonan.
The plans allow for an income tax rebate worth up to 5 per cent of the price of a home to a value of €400,000, allowing for a maximum rebate of €20,000.
The initial plans outlined that first-time buyers of homes up to €600,000 would also be entitled to the rebate, although the benefit would be capped at €20,000. The upper limit was changed to €500,000 following objections from Fianna Fáil, which wanted it kept at €400,000.
Central Bank rules
It was intended to help first-time buyers overcome the Central Bank rules on mortgage lending in place at the time.
The rules said that first-time buyers must accumulate a 10 per cent deposit on the first €220,000 of the value of a home, and 20 per cent of any value thereafter. They rules were changed last month so first-time buyers would only be required to have a deposit of 10 per cent regardless of the value of a property when applying for a mortgage.
The note to Mr Noonan said: “There is very strong evidence to indicate that policies such as the current proposal, which are intended to improve affordability, are ineffective given the inelasticity of supply.”
The officials also recommended restricting the plan to homes valued at €400,000 “with purchases in excess of this level not qualifying for any relief”.
This would be targeted at buyers of “modest homes” and could dampen potential increases in the price of new builds.
Grant scheme
The note also said that a grant scheme could be a more effective way of helping first-time buyers than a tax relief scheme “which may not be beneficial to individuals depending on their incomes in certain years”.
“It is important to note that the current proposal could be considered regressive in nature, as only those with sufficient incomes and the associated tax liabilities would be in a position to benefit.”
It also said that the Programme for Government said that “all new tax reliefs must be subject to ‘detailed cost-benefit analysis, public consultation and Oireachtas debate’”.
This commitment could not be met for this policy and since the Government viewed the policy as urgent, it could “waive the requirement for a cost benefit analysis in this case”.
“However, this sets a dangerous precedent and breaches the requirements set out in the department’s tax expenditure guidelines.”
