Rent to Buy Scheme

 SUMMARY 

Grant / Support Name: Rent to Buy Scheme  

Provider:  Developers  

Value:   Varies  

Overview: The Rent to Buy Scheme was created by property developers to help potential buyers get into their new homes more easily - and to ultimately sell more homes. With this plan, you start by renting the house and then have the option to buy it at the end of the rental period. 

Eligibility: There are no published eligibility criteria - it is up to the developer to decide if you qualify for the scheme. 

Special Conditions: There may be an upfront payment which you could lose if you don’t go on to buy the house. 

Not all properties are available under this scheme, and availability depends on the developer's offerings. 

Tax Implications: There are many versions of this scheme and the exact VAT treatment depends on the details of each specific case. See further details and examples below. 

ARTICLE                                   

The rent-to-buy scheme can generally be seen as an effort by property developers to entice prospective buyers into purchasing a home.  

The developer structures the agreement using an initial period of renting with an option to purchase at the end of the letting period. 

The advantage is  that you get to trial a property before potentially purchasing it.  

The downside is that conditions vary greatly so it is hard to know from the outset whether it is suited to you or not.  

The way it works is relatively simple to understand. You start by renting a property for an agreed period, usually 1 to 3 years. You’ll then have the option to buy the property at the end of the rental period. And, in addition, a portion of the rent you pay can be credited towards the purchase price, reducing the purchase price considerably. 

The advantages are clear. You get a trial period to experience the property and the neighborhood before making a commitment. It also provides you with valuable time to improve your financial situation and secure a mortgage, ensuring a smoother transition to homeownership. 

The Rent to Buy Scheme offers you a flexible path to homeownership, reducing immediate financial pressure and making it simpler to become a homeowner. Bear in mind though that the terms of the scheme can vary depending on the developer or property owner, and not all properties in a development will be automatically available under this scheme. Availability depends on the developer’s offerings. For specific details and availability, it’s best to consult with property developers or estate agents.  

LINKS       

You can find out more about the scheme on the Revenue’s website www.revenue.ie

Tax implications explained  

There are many variations of this scheme and as such, the exact Value-Added Tax (VAT) treatment can only be established by the facts of each individual case. However, this guidance provides information as to how to treat some of the variations of this scheme from a VAT viewpoint. 

Example: 

Dev Co Ltd built a housing estate. It is offering houses to prospective buyers under the 'rent to buy' scheme. The cost of building each unit was €160,000 + VAT1 of €21,600. The sale price of the house under the scheme is €300,000. 

The offer breaks down as follows: 

• Initial Payment of €6,000 

• 24 x €1000 monthly payments of €24,000 

• Payment on exercise of option to buy €270,000 

• VAT treatment of initial payment 

The initial payment represents consideration for the granting of the option to purchase the property at an agreed price. This €6,000 is subject to VAT at the reduced rate. 

Assuming the price is VAT inclusive, this means the VAT chargeable would be €714 .  

Monthly payments 

The monthly payments represent consideration for the letting of the property and, in some cases, additional consideration for the option. The way to determine how to apportion the consideration is to compare the monthly amount paid to the rent that a similar house would fetch in the same area. 

In this case there are a number of similar houses in the area advertised for rent at €800 per month. This would be accepted as the market rent. This means that consideration relating to the exempt letting is €800 and the consideration relating to the option is €200. There is no VAT chargeable on the €800 as it relates to an exempt letting. The €200 is liable to VAT at the reduced rate. Assuming this is VAT inclusive, this means VAT of €24 is chargeable. 

CGS adjustment of Dev Co's deductibility 

Dev Co must also adjust its deductibility as the property is being used for an exempt purpose. At the end of the second CGS interval Dev Co must calculate the amount of VAT to be paid in accordance with Section 64(3)(a) of the VAT Consolidation Act 2010 as follows: 

 C – D (C = reference deduction amount, D = interval deductible amount, see example in CGS – main provisions) 

1080 – 0 = €1,080 VAT payable by Dev Co at the end of its second CGS interval.  

Purchaser exercises option to buy 

At the end of the 24 months the purchaser exercises the option to buy. A discount on the purchase price of €300,000 is given by reducing the price by the money paid to Dev Co from the option and rental payments which is €30,000 (€6,000 + €24,000). 

VAT is chargeable on the final sales price of €270,000 at reduced rate. Assuming the amount is VAT inclusive, this means VAT of €32,115 is chargeable on the sale. 

Purchaser does not exercise option to buy 

If the purchaser does not exercise the option to buy there are no further VAT implications in relation to the transaction between Dev Co and that person. Dev Co's obligations on onward supplies If Dev Co sells the property to a third party (following the non-exercise of the option with the previous prospective buyer) it is obliged to charge VAT on the sales price. If Dev Co enters into another rent to buy scheme the same rules apply as above. 

Note: As the initial CGS interval will have already elapsed, Dev Co. would be obliged to repay 1/20 of the VAT deducted at the end of the CGS interval in which it has rented the property under the scheme and at the end of any subsequent CGS interval during which the property is rented. 

LINKS