The economic turbulence of the past few years has had a major impact on the European property market and Luxembourg has not been spared. The Covid pandemic, the war in Ukraine, high inflation and increased interest rates have all contributed to the marked slowdown in real estate and construction activity.

In response, the Luxembourg government recently announced an initial set of measures to revive the housing market and support construction projects. What are these new measures and how could they affect your property goals?

A series of tax incentives to boost the housing and construction sectors

An initial set of measures providing direct support for households to acquire or rent a home was announced on 31 January. In addition, a decision was taken to increase public investment in order to develop the country’s affordable housing stock.

Luxembourg's prime minister stressed that the measures have a threefold objective:

• to strengthen the construction industry and trades, and therefore protect jobs.
• to increase the housing supply.
• to help people buy or rent a home.

Further measures are currently under review and could lead to more announcements.

Five new tax measures applicable only in 2024

The tax measures announced by the government to have a retroactive effect as of January 2024 and will apply throughout 2024 in order to address the structural and ongoing issues in the housing sector.

1. “Bëllegen Akt” tax credit on the primary residence

The “Bëllegen Akt” tax credit applied to stamp duty and registration tax for the purchase of a primary residence has been increased from EUR 30,000 to EUR 40,000 per natural person.

This means that no stamp duty or registration tax is due for an individual buying a home for up to EUR 571,000, or a couple paying up to EUR 1,142,000.

2. Buy-to-let

A new “letting tax credit” will apply to investment in rental accommodation, set at EUR 20,000 per natural person.

This tax credit is reserved for off-plan developments. To be eligible for the tax credit, buyers must commit to letting the property for at least two years, starting no later than four years after the deed is signed.

3. Capital gains tax at a quarter of the standard rate

With the aim of increasing the supply of properties on the market, the capital gains tax rate on sales completed in 2024 will be reduced to a quarter of the standard rate. To be classed as a capital gain rather than a speculative profit taxable at the normal rate, the period between purchase (or construction) and sale must exceed two years.

Capital gains tax on real estate will go back up to half the standard rate on 1 January 2025. Moreover, to limit speculation, the minimum period during which a property must be owned will increase to five years for a capital gain, rather than speculative profit, to be recognised.

4. Introduction of a “special construction allowance”

To catalyse the homebuilding market in the short term, the government is introducing an additional “special construction allowance”. Taxpayers who generate taxable rental income in Luxembourg are entitled to this additional 4% allowance if certain conditions are met:

• The deed of purchase must be signed in 2024 and the property must be an off-plan development.
• The property must be bought to let.
• The additional 4% allowance applies to the year in which the property is completed (on a pro-rata basis for the months in which the building is considered to be finished) and the next six years.

It is calculated on the basis of the purchase/construction price (excluding land) plus related notary fees. This allowance cannot exceed EUR 250,000 and is added to the existing 2% allowance.

5. Capital gains tax exemption (deferral of tax)

If the proceeds of a property sale are in a social housing let in Luxembourg or in a property with an A+ energy rating, the capital gain will be tax-exempt.

In concrete terms, this means that the capital gain will not be taxed in the year of the sale, but carried over to the property in which the money is reinvested.

Four new measures with no time limit

Other tax measures that are not time limited have been announced.

1. Mortgage interest relief on the primary residence*

The caps on mortgage interest relief for a primary residence have been increased by a third:

• 1-5 years: EUR 4,000 (instead of EUR 3,000)
• 6-10 years: EUR 3,000 (instead of EUR 2,250)
• 11+years: EUR 2,000 (instead of EUR 1,500)

These amounts apply to each member of a household.

*Primary residence: the main home occupied or due to be occupied by the owner

2. Tax exemption for rental income from social housing

The amount of net income from the rental of properties through a social housing management company that will be tax-exempt has been increased to 90% (from 75%).

3. Capital gains tax exemption when a property is sold to the Fonds du Logement

If an individual sells a property to the Fonds du Logement, the capital gain or profit will be exempt from tax. The same rule already applied to sales of properties to the State, municipalities and associations of municipalities.

4. Tax exemption of the “rent bonus” paid by employers

To help young people when they start work, the government is waiving tax on 25% of the bonuses paid by their employer to help with rent, subject to conditions.

Naturally, we will keep you up to date with future developments.

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