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Mortgage write-offs 'could be subject to 33pc tax'

An accountants’ body says it believes any debts written off a person’s mortgage could be subject to Capital Gains Tax.

Image: Alexander Raths via Shutterstock

STRUGGLING FAMILIES who have part of their mortgage debt written off by banks could face a tax bill for a third of the amount written off, it has emerged.

An accountancy body has said an inadvertent loophole in tax law means mortgage forgiveness is treated as if it was a gift or inheritance – and is therefore liable to Capital Acquisitions Tax, which is charged at 33 per cent.

ACCA Ireland, which discovered the issue, says it has asked the Revenue Commissioners for guidance in determining whether it intends to tax any amounts that have been written off a mortgage.

“Forgiveness of debt in certain circumstances is subject to Capital Acquisitions Tax at 33 per cent,” said ACCA Ireland spokesman Darragh Kilbride.

“However, mortgage debt written off under [the Mortgage Arrears Resolution Process] appears to have been inadvertently caught by the tax legislation, and is taxable under self-assessment.”

Kilbride said a mortgage holder could face interest and penalties if they did not declare the amounts which had been written off.

The body says its fears are further compounded by the inclusion of a special clause in the Finance Bill, which is to be signed into law this week, which specifically excluded personal debt write-downs from being subject to tax.

Because the mortgage restructuring process announced by the government is outside the terms of the insolvency regime, however, people who are forgiven some of their debts may end up having to pay tax above a certain threshold.

Major write-downs could leave tax bill of thousands

In Budget 2013, the threshold for ‘gifts’ from people outside the family fell from €16,750 to €15,075.

This means that someone who has €30,000 written off a €300,000 mortgage could be asked to pay 33 per cent tax on almost half of the amount the bank agrees to write off – leaving them with a tax bill of close to €5,000.

Kilbride said not all write-downs would necessarily be taxable – but that the circumstances of each loan, and the security on it, would dictate whether tax would be charged.

“How the banking documents themselves are constructed will have a big impact,” he said.

“For example, if the security on the loan is weak or does not allow the bank to pursue the borrower personally then specific tax advice should be sought as to the tax impact in these situations.

“The big concern here is that this issue may not come to public attention for many years when the borrowers are back on their feet and are hit with a tax bill and interest and penalties. A statement by Revenue now would clarify the issue and ease borrowers’ minds.”

The Revenue Commissioners could not offer a comment on the issue when contacted by TheJournal.ie this lunchtime.

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Gavan Reilly

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