Up, up and away: what’s in store for the Local Property Tax

Minister for Housing Eoghan Murphy has signalled a possible overhaul of the Local Property Tax (LPT) regime, but without providing much in the way of detail.

Currently the tax is based on the market value of a house, which many claim is unfair as it penalises those living in modest houses in high-priced areas.

While the current set of bills are pegged to 2013 property values, this is due to change in 2019 when tax will be recalculated to reflect prevailing values, and therein lies the difficulty.

If prevailing property valuations apply in 2019, most homeowners would see their bills rise steeply, in some urban areas by as a much 100 per cent, reflecting the rapid growth in house prices in the intervening period.

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Fallout

The politcal fallout for the Government could be considerable as the hike in property tax could wipe out the money put back in people’s pockets from recent budgets in an instant.

As a result, Minister Murphy has expressed support for a new LPT system that isn’t exclusively based on market values – and for one that might take into account other factors such as location and local authority service levels.

Introduced, under the direction of the Troika, at the height of Ireland’s financial emergency in 2013, LPT was intended to put the Government’s tax base on a more stable footing and insulate it from future market crashes.

In practice, this meant reducing the exchequer’s over-reliance on transactional taxes like stamp duty, which can rise and fall on the whims of the market, in favour of more stable revenue streams – in this case home ownership.

LPT is self-assessed, meaning individual homeowners calculate the amount of tax they owe based on a rough estimation of the value of their property with reference to a set of guide values issued by Revenue.

For example, if a house is valued at €230,000 in 2013 it is liable to LPT of €405 per annum, which represents a 0.18 per cent tax on €225,000, the midpoint value of the €200,000 to €250,000 valuation band.

Depending on what price band the property falls under, the homeowner pays a set amount of tax.

Compliance

Currently the tax nets the exchequer about €477 million annually and while opposition groups initially threatened a mass boycott, the compliance rate is now at 97 per cent.

Because homeowners in urban areas, where the property price inflation has been strongest, are likely to suffer the biggest jump in their LPT liability come 2019, some have advocated changing the system from one based on market value to one based on property size.

However, this would perhaps unfairly penalise rural dwellers, who don’t enjoy the same level of public services as their urban counterparts.

Alternatively, the minister could opt for a hybrid of market valuation and property size.

However, experts believe this might prove a headache to implement and that ultimately the Government may opt for the soft option of simply reducing the tax ahead of 2019 recalculation.

While the Irish Government could not forgo the revenue it derives from the LPT, the balanced budget, which is forcasto for 2018, means it could forgo some of the likely revenue jump arising the 2019 recalculation.

One option open to the Minister is simply to lower the tax form from 0.18 per cent of the property value to 0.12 per cent, thereby avoiding a major shake-up in the currrent system while keeping a lid on the liability. This is what the UK government opted to do in the face of a similar set of cicrumstances.

Either way, the Government wants the issue off its back before the next election, and so change of some kind or other is likely.