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Property


By Tax-News.com Editorial
August 14, 2013


Generally speaking, governments in free market economies like to encourage people to buy property, and they often help people to get their first foot on the property ladder. Equally however, land and real estate can be a useful cash cow for national treasuries, especially those most in need of revenue, and once enticed into the property market, investors may pay considerably more in real estate taxes. This article rounds up some of the main developments in the area of property taxation over the past few months.


Europe

In certain parts of Europe, the emphasis has been firmly on fiscal consolidation, and few governments have missed an opportunity to raise additional revenue when presented to them. In some countries, property has been one of the principal means by which new revenue has been generated, although some of these taxes have been strongly opposed.


Italy

Changes to the country’s unified property tax (IMU) have been a major topic of conversation in Italy’s households since its introduction at the beginning of last year, and the tax featured prominently in the verbal battles between the various political coalitions vying for votes in the general election earlier this year.

IMU reintroduced the local tax on prime residences that had been taken off by a previous Berlusconi government in 2008, but has been providing a major part of the increased revenue in the Monti government’s "Save Italy" budget, which was approved at the end of 2011 and is designed to enable the country to reach fiscal balance by the end of 2013.

The tax is applied (with local variations and an allowance for family dependents) at a standard rate of 0.40% to first residences, with all other residences being subject to a rate of 0.76%. The first payments of IMU in June and September last year were said to have reached expectations, and the final payment which was payable on December 17, 2012, was also said to have lived up to revenue expectations.

On June 15, 2013, the coalition Government agreed to certain policies designed to improve tax administration, together with minor tax changes. However, the removal of IMU on first residences, remain unresolved.

The Government has already delayed the interim IMU payment for 2013 until September 16, allowing for reform of the tax by August 31 this year, but Silvio Berlusconi, the leader of the Italian center-right, has maintained his call for IMU reform, first aired during the recent elections, and is also supporting warnings from others, particularly businesses in retail and commerce, of the effect on consumer demand of raising the normal VAT rate during a period of continuing economic recession.

A study by the Treasury on how Italy's local property tax could be reformed, which pointed out how regressive it would be if it was abolished as required by Berlusconi, has caused political difficulties for Enrico Letta's Government.

The Treasury study, as introduced by Minister of the Economy Fabrizio Saccomanni, examined nine hypotheses put forward for IMU reform, but was clear in its rejection of the tax's total cancellation, which, it was said "would not seem to be fully justifiable on the grounds of equity or tax efficiency." It claimed that a cancellation would have "a strongly regressive effect," to the greatest benefit of those with the largest homes.

It remains to be seen if Berlusconi gets his way.


Ireland

Ireland’s Local Property Tax (LPT) formally entered into force on July 1 and was among the requirements imposed on the Irish Government as part of its European Union/International Monetary Fund bailout package.

The LPT is self-assessed and charged at 0.18 percent of the market value of residential properties worth up to EUR1m, and at 0.25 percent on any excess value over EUR1m. Property values are organized into a number of thresholds – from EUR0 to EUR100,000 and then in EUR50,000 bands. The tax liability is calculated by applying 0.18 percent/0.25 percent to the mid-point of the relevant band.

The Irish Revenue Commissioners had collected more than EUR175m in LPT payments by July 24, 2013.

More than 50,000 reminder letters were sent to Ireland's homeowners last month, as part of the Revenue's LPT compliance program. Those in receipt of a reminder have seven working days from the date of the letter to file their LPT return online. If they fail to do so, Revenue will issue instructions to their employer or pension provider to deduct an LPT estimate from their wages or occupational pension.


Greece

In April 2013, Greece's finance minister, Yannis Stournaras, confirmed that an unpopular emergency property tax introduced in 2011 will be replaced by a new uniform progressive tax, following an agreement brokered between coalition leaders hours ahead of talks with ‘Troika’ lenders.

Property owners in Greece are currently liable to pay between EUR4 to 5 per square meter. The reformed tax will be applicable to a wider range of property, including farmland, and it is hoped that some property owners will see lower bills. PASOK leader Evangelos Venizelos has also suggested that a tax-free threshold may be introduced.

The property tax will continue to be collected through electricity bills until 2014, in order to decrease the administrative burden on the country's tax authorities.


United Kingdom

April 2013, saw the introduction of the Government’s new Annual Residential Property Tax (ARPL) which applies to properties worth more than GBP2m (USD3.2m) and owned by companies and collective investment schemes (called "non-natural persons").

Companies and investment schemes have been used as "corporate envelopes" to avoid Stamp Duty Land Tax (SDLT), and it is hoped that the ARPL, one of the government’s flagship anti-avoidance measures, along with an associated new Capital Gains Tax, will put an end to the avoidance. About 90,000 properties are estimated to be affected.

The ARPL went into effect as planned despite criticism of the new levy in a House of Lords hearing back in January, with one tax expert warning that the legislation is too weak to succeed in its aims and that an approach comparable to anti-money laundering legislation is required.

The UK tax authority, HM Revenue and Customs (HMRC), also has said that from September 6, 2013, it will be taking a "much closer look" at people who have sold properties other than their main home, but who appear to have paid no Capital Gains Tax, using information on property sales in the UK and abroad, and consulting a database of all properties liable for SDLT.

The tax body specifies that holiday homes and rented-out properties are included, and that an exemption for a main home may not apply if it has not been the only home or main residence for some time, if the property has been used for business or letting, or if part of the garden has been sold.

HRMC claims that “hundreds” of people have come forward to declare capital gains tax liabilities in the last few months as part of a “disclosure opportunity” which lasted until August 9. Payment under this scheme is due to be made by September 6. 

Another noteworthy development occurred in June when the Scottish Government took advantage of certain powers devolved from the UK Government in the area of taxation to introduce new legislation creating a tax on land and building transactions.

The Bill introducing the new Land and Building Transactions Tax, which replaces Stamp Duty with a new progressive tax structure more closely related to the value of a property, was approved by the Scottish parliament on June 25, 2013, and is the first tax Bill to be passed in Scotland since 1705. 

Scotland's Finance Secretary John Swinney, who introduced the Bill into Parliament, described the move as an "innovative approach to taxation that is much better aligned with the Scottish market, with Scots law and practices, and the principle of progressive taxation."


France

Allegedly "discriminatory" tax rules on new residential property have resulted in France's referral by the European Commission to the European Court of Justice.

Under French tax law, accelerated depreciation can be applied to new residential property in the country that is intended to be let for a minimum of nine years. By contrast, there is no comparable provision for a French taxpayer investing in a residential to-let property in another EU member state.

The Commission claims that, in practice, this means that taxpayers investing the same amount in immovable goods abroad would face a higher tax liability. Consequently, the French provisions are incompatible with the free movement of capital, which it says is a fundamental principle of the European Union's (EU) Single Market.

Determined to fundamentally reform the country's outdated and "unfair" system, the French government is reportedly making plans to include household income in the calculations of dwelling tax (la taxe d’habitation) in future.

Dwelling tax is currently calculated according to the cadastral rental value of a property and using a tax rate decided by individual local authorities in France.

Introducing household income into the base of the tax would serve to ensure that the tax is fairer, the government says.


Serbia

The Serbian Government has retracted plans to tax second properties worth more than EUR50,000.

Speaking on an economics news programme, Finance Minister Mladjan Dinkic explained that it had been discovered that many people have second properties which they have inherited and are currently unable to sell. He suggested that the tax will be implemented at a future date, but that under current conditions the tax would have had an impact on the middle classes rather than just the wealthiest owners. 


Germany

In February 2013, Germany’s Federal Fiscal Court (BFH) clarified the rules governing the tax deductibility of professional expenses incurred when renting out a property.

The Munich Court’s judgment will make it significantly harder in future for owners to benefit from the tax break when the rental property has remained vacant over a long period of time.

The ruling follows the Court’s examination of an appeal by the owner of two properties in Germany, who had submitted an expense claim in his income tax returns over a period of several years in respect of the vacant properties. The tax authorities had, however, rejected his claims, citing a lack of rental intention, arguing that the plaintiff had only placed four advertisements in a year, which had clearly not proven successful.


Asia

Property taxes are also on the rise in certain parts of Asia, with sharp increases witnessed in Hong Kong and Singapore in particular over the last 18 months. However, whereas European governments are looking to property taxes to replenish spent coffers, some Governments in Asia are using them as a tool to cool dangerously overstretched property markets, with the hope that air slowly leaks from the bubble, rather than that it bursts, possibly taking the economy with it.


Singapore

In July 2013, Singapore’s Ministry of Finance issued a public consultation document to seek feedback on its proposals to property tax refunds for unoccupied residential and non-residential properties with effect from January 1, 2014. This measure, announced in the 2013 Budget, is intended to align with the policy intent of property tax, which is to tax property wealth rather than use, and ensure consistency in the tax treatment of all vacant properties.

The property tax restructuring will be phased in over two years from January 1, 2014. About 950,000 owner-occupied residential properties with annual value of less than SGD59,000 (USD46,650) will enjoy tax savings of up to SGD80. The top 1 percent, or about 12,000 of owner-occupied residential properties, will pay higher property taxes, says the Government.

With effect from January 12, 2013, Singapore’s government has imposed a comprehensive package of measures to cool the residential property market, including, for the first time, the introduction of a Seller’s Stamp Duty (SSD) on industrial properties to discourage speculative activity in the industrial market.

The government has already implemented several rounds of measures to cool demand and expand supply, so as to moderate the increase in housing prices. For example, in December 2011, in addition to the standard buyer’s stamp duty of between 1% and 3%, it placed an Additional Buyer’s Stamp Duty (ABSD) at a rate of 10% on the purchase price or market value of residential property purchased by foreigners and non-individuals.


Hong Kong

The Hong Kong Government was recently forced to defend the series of tax measures taken to cool down Hong Kong's property market inflation, and to give priority to the home ownership needs of Hong Kong Permanent Residents (HKPRs).

The Government announced another round of general demand-side management measures in February 2013, including the doubling of the ad valorem stamp duty rates for all property transactions, while stamp duty for transactions of HKD2m (USD258,000) or below rose from a HKD100 flat fee to 1.5 percent of the transaction's value, to combat speculative activities. The new stamp duty rates do not apply to HKPR buyers who are not beneficial owners of any other residential property in Hong Kong at the time of acquisition of a residential property.

Stamp duty statistics from the Inland Revenue Department indicate that purchases of residential property by non-local individuals and companies fell to a monthly average of 249 cases, or 4.6 percent of total transactions, in the first five months of 2013, markedly below the monthly average of 1,089 cases, or 13.6 percent of total transactions, from January to October 2012.

However, while the residential property market in Hong Kong has shown signs of cooling down, property market sentiment remains unsettled, meaning that more tax increases could be on the cards in the months and years ahead. Indeed, a tax on unsold new homes, in order to prevent developers hoarding them for resale at higher prices, is one measure that the Government is considering.


China

The National People’s Congress adopted, on March 17, 2013, the Chinese Government’s report on a 2013 Economic and Social Development Plan that includes confirmation of its intention to expand the property tax pilot schemes.

It had already been assumed that there would be an increasing role for property taxation in China this year, by way of an extension of the scheme that was originally introduced on luxury residential properties in Shanghai and Chongqing in 2011, and is currently levied at annual rates between 0.4% and 1.2%.

It is still expected that Beijing will be one of the first cities to announce further measures to restrain property prices that could well involve participation in the property tax pilot.

It had already been announced earlier in 2013 that, with the Government looking to retain control over China’s house price inflation that, amongst other measures, the existing capital gains tax on home sales is now to be strictly enforced.  

In February 2013, the State Council looked at continuing and accentuating its policies to restrain control over China’s housing market prices. Local authorities are to be encouraged to maintain as tight a grip as they can on their property markets in 2013, and in particular on those investors speculating on future price increases.


Taiwan

Taiwan meanwhile is studying alterations to the luxury tax as property prices continue to rise faster than most incomes.

Under its current terms, the owner of a property suffers a 15 percent tax on its sale price if it is sold within one year of its purchase, falling to 10 percent if sold during the second year. However, according to the Government, the tax's current structure, as it applies to real-estate, does not catch those wealthier speculative investors who can afford to wait for longer than two years before taking their profits.


South Korea

South Korea, on the contrary, is facing altogether different issues, and has used temporary tax breaks in order to encourage more buyers into the property market and help boost the economy.

Recently, the Government confirmed that it is looking at revising South Korea’s property tax code as part of its plan to stimulate the economy, and this was discussed at the first "Meeting on Reinvigorating the Economy" on August 7, hosted by Deputy Prime Minister Hyun Oh-Seok.

The Government has said that it will firstly work in close collaboration with the National Assembly in order to ensure that the property market measures that were announced on April 1, 2013, and included an extension for 2013 of the capital gains tax exemption on buyers of homes valued at less than KRW900m (USD804,500), are passed as soon as possible.

Hyun also confirmed that plans are to be finalized to lower property acquisition taxes as early as possible. An exemption from property acquisition tax was granted in April, but only until the end of June this year, and the Ministry of Land, Infrastructure and Transport has since been campaigning therefore that it should be, at least, immediately reinstated.


United States

In the United States, the main tax impinging on property at the federal level is capital gains tax on the proceeds of real estate sales, although most capital gains on home sales are exempt from the tax. There are real estate taxes, but these are levied by state and local governments and are deducted from federal income for tax purposes by approximately one-third of US taxpayers who itemise their deductions (as opposed to utilising the standard deduction). Perhaps the most significant tax provision, certainly in revenue terms, is the mortgage interest deduction.

Both President Barack Obama's fiscal commission and the Bipartisan Policy Center's Debt Reduction Task Force recommended replacing the mortgage interest deduction with a tax credit for mortgage interest paid and eliminating deductibility of property taxes, while, in his 2014 Budget, the President proposed to limit the tax benefit from itemized deductions and certain other tax preferences – including interest and property taxes paid on mortgages for owner-occupied homes – to 28 percent of the amount of the deductions.

There is also the risk that these generous tax breaks for homeowners in the US could be changed or disappear altogether under a comprehensive tax reform bill which may be introduced before the end of 2013.

However, a new study by Benjamin Harris, senior research associate at the Urban-Brookings Tax Policy Center, has analyzed the effect of possible reforms to United States property tax preferences, and found that any reform that has a likelihood of being considered in Congress will have only a modest impact on housing prices in selected cities.

The various tax provisions applying to property ownership present a complicated picture, reflecting various policy intents. Therefore, earlier in the year, the House of Representatives Committee on Ways and Means held a hearing on the United States federal tax provisions that affect residential real estate, as part of the Committee's continuing work on tax reform.

While this hearing came to no firm conclusions, it served to highlight the fact that the mortgage interest deduction is a costly “tax expenditure” for the federal Government to maintain, although lawmakers appear to be in favour of retaining tax provisions that encourage home ownership.

 

Tags: legislation | Ireland | Finance | law | Greece | Study | stamp duty | Serbia | offshore | United States | Taiwan | France | interest | Germany | Europe | Hong Kong | Italy | China | Singapore | property tax | tax

 

 

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