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11 July 2017

Tax question of the week #3

Question:

Client bought property for €3m in 2008. He has a bank debt of €2.5m. There are no capital allowances on the property. The bank accepts €1m sale proceeds (market value) in settlement of the loan. The bank writes off the €1.5m capital.
The bank also writes off €100k in interest arrears.

What are the tax consequences?

Answer:

  1. In general, for an individual developer/dealer in land the €1.5m may be taxed as a trading receipt.
  2. This trading receipt is offset by the corresponding “loss” arising on the disposal of the stock.
  3. Broadly as regards investment assets, if there is no tax avoidance, there is no “gift” from the bank to the customer (Ebrief 12/13).
  4. No CGT as there is a loss on the sale of the asset (€1.5m).
  5. The capital loss is restricted to the economic disadvantage suffered.
  6. If client has claimed interest relief (on the interest he did not pay) he is subject to tax under Case IV on the interest write-off.