PROPERTY TAX – MANY ISSUES NEED TO BE CONSIDERED
At this stage, it is widely accepted that the Irish Government propose to introduce an annual tax on residential property on the back of a recommendation by the Commission on Taxation as one solution to help improve the deficit in Ireland’s public finances.
Admittedly, introducing an annual tax on all privately-owned residences in the state will broaden the tax base of a country that heretofore has been too reliant on income taxes and specific property transactions. However, it has been estimated that introducing a uniform residential property tax in Ireland is unlikely to generate more than €1 billion per annum, which will do little to improve the national finances to any significant degree. Property tax should therefore not be seen as the panacea to Ireland’s exchequer deficit but rather as part of a re-structuring of the Irish tax code to avoid fluctuations such as those seen in the period 2008-2009 when income tax and property-related tax receipts fell dramatically.
Introducing a residential property tax won’t go down well with the Irish electorate. It will create huge controversy politically this Autumn and will bring back awful memories of the bureaucratic nightmare that was Residential Property Tax (RPT) in the 1990’s – a tax that created huge discord and was eventually phased out. In addition, regardless of what methodology is adopted for calculating individual liabilities, there will undoubtedly be issues with regard to people’s ability to pay this proposed tax considering the current economic climate.
Bizarrely, the property industry is very rarely consulted when important changes that have huge implications for the market are devised by Government. As a result, Government have on numerous occasions had to row back on ill-advised propositions once the real implications of their actions subsequently manifested themselves. A case in point in recent weeks is the Government’s announcement that they intend to ban upward only rent reviews in commercial leases. The suggestion is that this move will help commercial occupiers who are currently struggling to make rental payments when in actual fact, as the property industry have pointed out the proposed legislation will do nothing to alleviate these pressures and instead will interfere with the operation of a market that if managed properly has the ability to regulate itself. Whilst no-one is denying that restructuring the Irish tax code is necessary at this juncture and that a property tax akin to what applies in other countries could well be justified in this regard, we urge Government in this instance to consult with professionals in the property industry and other relevant stakeholders who will be able to point out the potential implications before finalising proposals for this tax.
One issue that will definitely have to be taken into consideration is stamp duty. There is no doubt that in introducing a new annual property tax, existing stamp duty will have to be phased out or at the very least reduced dramatically. It is inequitable to expect the electorate to pay a huge transaction tax when they purchase their home and then on top of that be liable for a not inconsiderable annual levy. Another issue that needs consideration is an exemption for the thousands of purchasers who paid out vast sums of money in stamp duty to Government in recent years who are effectively been asked to now pay up to an additional €1,000 per annum for the pleasure of living in these homes, that are now worth far less than they originally paid for them.
There is much speculation about how the system will operate with some suggesting that the tax will be implemented on the basis of a flat rate per property. Some suggest that the tax payable should be linked to the value of the residential property while others suggest that tax could be calculated based on the size of the property. All of these suggestions pose their own problems. Implementing a flat rate per property is clearly inequitable and will put greater pressure on the poorer in society. Implementing a tax based on property value will unfairly penalise those living in urban areas whereas implementing a tax based on property size will unfairly penalise those living in rural areas that typically have larger homes. One of the least unfair suggestions is to base the tax on a band of property values predetermined by Government. For many years, we have bemoaned the fact that the Irish Government has very poor statistical information on the housing sector. Implementing a national residential property tax in the absence of a national housing register or decent national house price statistics is practically impossible and it is clear that the Irish Government don’t have the resources (or the time!) to compile this in the short to medium term. Therefore, if the banding system is adopted it will be the responsibility of homeowners themselves to produce their own annual valuations. This is a difficult exercise in a market with so little transactional evidence and the natural outcome will undoubtedly be that most of the electorate will underestimate the value of their property in order to reduce their liability. How will the Government ensure that homeowners select the appropriate bands for the value of their property and what will the penalties be for those who underpay or indeed avoid payment? While the Government might hope that getting people to value their own properties will reduce the bureaucracy (and cost) involved in implementing this tax, the reality is that a huge effort will still be required to explain, administer and manage the process nationally.
A host of other questions spring to mind. Will the system be administered by local authorities or indeed the Revenue Commissioners and why is it being suggested that the local authorities will benefit financially when the primary reason this tax is being introduced is to help plug the gap in Government finances? Another very significant issue is that the Irish Government have recently passed legislation to force owners of holidays homes and investment properties to pay relevant local authorities an annual €200 tax on these properties at a time when proposals are ongoing about introducing a national residential property tax for all property owners (or at least those that have an ability to pay in the current climate). Surely having one overriding system to tax all property owners accordingly and introduced simultaneously would be preferable to having two separate processes coming into operation separately?
For many years, the Irish Government have been mooting the idea of introducing taxation on residential property in line with that administered in other jurisdictions. They are effectively now being forced to explore this option seriously considering the deterioration in public finances that has manifested itself. The issue won’t go down at all well with the Irish electorate, will be damaging politically and will undoubtedly be debated in detail over the coming months. Whilst it seems inevitable that this taxation will be implemented in some shape or form over the next 12 months, we strongly urge the Government not to rush this through without considering all of the implications and consulting with relevant stakeholders who can help them first.
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Director, CB Richard Ellis, Ireland
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