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International Real Estate Taxation

By Editorial
June 19, 2012

In our previous feature on international real estate taxation, we recounted how governments in Europe in particular were becoming increasingly reliant on higher or new property taxes as part of their deficit reduction strategies, and this is a trend that has continued into 2012. However, we are also witnessing property taxes being used in Asia for quite different reasons: namely as a way to cool overheated real estate markets.

Perhaps the most significant new property tax measure to have been announced recently was in the United Kingdom. There had been much speculation in the run up to the 2012 Budget in March that Conservative Chancellor George Osborne would introduce some form of ‘mansion tax’ on properties worth in excess of GBP2m to secure support from left-leaning junior coalition partner, the Liberal Democrats, for lowering the top rate of personal income tax.

When the Budget was announced in March, Osborne duly did lower the top rate of tax, by 5% to 45%, and also proposed a range of measures designed primarily to counter tax avoidance by wealthy individuals and foreigners from avoiding the tax on high-end property purchases. These included a 15% rate of Stamp Duty Land Tax (SDLT) on acquisitions of residential dwellings costing more than GBP2m by certain ‘non-natural’ persons.

Other measures designed to extract more revenue from luxury property purchases were set out in a consultation paper released earlier this month, which included a new annual charge on residential properties valued over GBP2m owned by certain ‘non-natural’ persons (broadly companies, partnerships including companies, and collective investment schemes), and an extension of the capital gains tax (CGT) regime to the disposal of UK residential property by non-resident, non-natural persons. 

Both measures are part of a package to ensure the "fair" taxation of residential property and to clamp down on avoidance, including through ‘enveloping’, where a corporate package, typically registered in an offshore jurisdiction, is used to wrap up a residential property as a way of avoiding SDLT. While buying into the London property market in this way is an important source of business for jurisdictions like Jersey, the island’s finance industry does not, however, expect these new measures to have much of an impact. “The demand for such properties has been much in evidence from overseas buyers many of whom will still see the purchase of London-based residential property as an attractive proposition despite the imposition of the additional stamp duty charge,” noted Jersey Finance's CEO Geoff Cook, as he sought to reassure investors.

There was, however, some good news for property owners in the UK earlier in the year when a tax tribunal decided that holiday let owners could claim Business Property Relief (BPR) for inheritance tax (IHT) purposes. In the ruling, the First-Tier Tax Tribunal dismissed HMRC’s argument that furnished holiday lets should not be considered a business for IHT purposes. It ruled that “an intelligent businessman would not consider them to be investments”. Holiday let owners could now be in line for a tax windfall, although accountants James Cowper suggested that property owners should still look to satisfy HMRC’s more stringent tests wherever practical in case future developments go against taxpayers. 

Meanwhile, Italy is in the process of reforming its system of property taxation as part of Prime Minister Mario Monti’s ‘Save Italy’ budget, which is aimed at bringing the government’s finances back into balance by 2013. Indeed, it is expected that half of the EUR20bn deficit reduction package will come from the introduction in 2012 of IMU, the new unified property tax, at a rate of 0.40% applying to first residences and with all other residences being subject to the expected standard rate of 0.76%. This extension of local property taxes to primary residences, accompanied by a 60% average increase in the official value of properties, should bring in an extra EUR10bn per year.

While Monti has earned praise from abroad for his willingness to make unpopular fiscal decisions and hopefully avoid a potential crisis of similar proportions to that currently gripping Greece, he has not made many friends at home with his budget proposals, with additional taxation accounting for the vast majority of the fiscal consolidation measures. Niccoló Rinaldi, head of the Italian opposition party in the European Parliament for instance, described the Italian tax on the value of overseas properties and financial assets, known as IVIE, as “particularly odious and inequitable”, mainly because property held abroad by a company or trust will escape the tax, meaning the greater burden will fall on the weakest taxpayers.

According to a circular released by the Italian Treasury in May, local authorities in Italy will have had to approve their IMU tax rates and deduction thresholds by September 30 this year, but those rates will then be subject to change by Italian government decree, by December 10, 2012, in order to protect the revenue expected from the tax.

Ireland’s new Household Charge, which has been imposed on every household in the country in preparation for a new property tax, is also continuing to generate a lot of criticism. According to the findings of a Paddy Power/REDC poll, only 61% of liable households expect to pay the tax and over 5,000 people marched through the streets of Dublin in protest against the charge in March this year.

In April, public policy think tank the Economic and Social Research Institute told the government that the planned property tax could be fairer than the current interim household charge through the introduction of income exemption limits. There is little chance, however, that the Irish government will drop its plans to introduce a property tax, as it forms a key part of the country’s bail-out deal with the European Union and the International Monetary Fund, and will likely be in place by 2013/2014 come what may.

Cyprus is another European Union country which has raised property taxation as part of a package of austerity measures. In a move expected to generate around EUR24m (USD34.5m) in additional revenues, the tax bands on immovable property are to be altered. Based on 1980 property values, immovable property with value of EUR120,000 or over will be subject to tax, down from EUR170,000 previously. 

While these tax measures are hardly likely to help revive the largely depressed real estate markets of Europe – they are being applied purely as revenue generation measures – certain governments in Asia are using property taxes more as a way to influence market behaviour.

One prominent example has been Hong Kong, where the local property market has been largely uncorrelated with general world trends in recent years. Hong Kong’s government attempted to apply the brakes to the local property market back in November 2010 with the imposition of Special Stamp Duty (SSD) on the short term resale of residential property. This measure appears to have had only limited success in deterring speculators however, and by April this year, Hong Kong’s property prices had increased by 8% over the levels seen at end-December 2011, whereas gross domestic product growth of only 1% to 3% has been forecast for Hong Kong for 2012 as a whole. As of March this year, prices were 82% higher than late 2008 levels. Compared to their 1997 peaks, flat prices were up 10%.

In a speech to the Oxford and Cambridge Society of Hong Kong, Financial Secretary John C Tsang said that a stable property market remains a priority for the government, and that it would have “no hesitation in applying further measures,” if necessary. He considered that Hong Kong still needs to avoid the possibility of “a potentially dangerous housing bubble forming in the market,” but that it has “the financial resources and the tools at (its) disposal to achieve a positive outcome”.

By June, the government hinted that further measures were in the pipeline in order to dampen the territory’s real estate market. In remarks to the Legislative Council, Tsang urged individuals to be prudent and aware of the potential risks when buying property, warning that Hong Kong must be well-prepared to face deterioration in the external environment and a further slowdown in the city’s economy. While more stringent lending criteria have already been imposed on banks, further tax measures cannot be ruled out.

As a densely populated a prosperous city-state, Singapore is also facing property bubble dangers and has used similar measures to try and quell demand. These measures also appear to have had limited impact however. In April, following the government’s announcement in December last year of an Additional Buyer’s Stamp Duty (ABSD), the Urban Development Authority (UBA) disclosed that Singapore’s estimated private residential property price index fell in the first quarter of 2012 compared with the last quarter of 2011, but only by 0.1%. Nevertheless, the UBA indicated that the imposition of the ABSD affected property investment demand at the beginning of this year, especially for the more expensive homes. 

China has also been grappling with an overheated property market for a number of years now, and is widely anticipated to impose a nationwide property tax after trialling such a tax in certain urban areas. Indeed, the latest step towards a national property tax was taken in March this year, when the National Development and Reform Commission confirmed that the pilot property tax presently operating in Shanghai and Chongqing will be extended to other cities in China later this year. Last year, the Ministry of Finance advised that a property tax on the residential sector was necessary for the sound working of the property market and confirmed that the government expected that, eventually, it would be rolled out nationally. Exactly when the national property tax will be introduced is still uncertain, however.

What is more certain though, is that governments around the world, with little regard for the state of their local economies or real estate markets, will probably continue to lean on the property sector for additional revenues. The fact that recent news stories about property tax cuts are conspicuous by their absence should at least be an indication that this trend is set to continue!


Tags: real-estate | United Kingdom | Italy | Hong Kong | Singapore | China | Jersey



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