Are mortgage write downs and debt forgiveness subject to 33% tax?

At the end of last month, the Association of Chartered Certified Accountants (ACCA) warned that mortgage write-offs and debt forgiveness taking place under the Mortgage Arrears Resolution Process (MARP) could be treated as a taxable gift under Capital Acquisitions Tax (CAT) rules and therefore subject to 33% tax. In legislation the definition of a taxable gift includes “the release, forfeiture, surrender or abandonment of any debt”. The ACCA had particular concerns over this due to the fact that debt write offs which will take place under the new Personal Insolvency Act (as opposed to under MARP), have been specifically stated by government as not being subject to CAT. The ACCA asked Revenue to clarify the position regarding debt write offs which take place under MARP.

A Revenue spokeswoman responded shortly thereafter to advise that they would not deem mortgage write downs to be taxable provided that Revenue are assured of the “bona fides of particular arrangements”, i.e. that the debt forgiveness scheme is legitimate and undertaken purely for commercial reasons.    

Revenue have clarified their position in e-Brief No. 12/13 issued on Tuesday (2^nd April), which reads:

Section 5 of the Capital Acquisitions Tax Consolidation Act 2003 provides that a person is deemed to take a gift where, under or in consequence of any disposition, that person becomes beneficially entitled in possession, otherwise than on a death, to any benefit otherwise than for full consideration in money or money’s worth paid by such person.

By virtue of the definition of "disposition" in section 2 (1) CATCA 2003 the release, forfeiture, surrender or abandonment of any debt or benefit, or the failure to exercise a right may be subject to CAT in certain situations.

Where for bona fide commercial reasons, a financial institution enters into a debt restructuring, forgiveness or write-off arrangement with a customer, Revenue’s approach, subject to being satisfied as to the bona fides of the arrangement (which may be subject to Revenue audit or enquiry) is that the financial institution is not intent on making a gift of any sort to the mortgagor/debtor – and accordingly the mortgagor/debtor would not be subject to a CAT charge in respect of any such debt restructuring, forgiveness or write-off arrangement.

This approach will only apply in the above-mentioned circumstances. In particular, should any debt restructuring, forgiveness or write-off arrangement be undertaken for the purposes of the avoidance of tax, the treatment outlined above would not apply.

In summary therefore, so long as Revenue are happy that the debt forgiveness is legitimate and a bona fide commercial transaction, no tax liability will arise.

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