Revenue from stamp duty has fallen dramatically and the time may be right for property tax – but pundits think it’s still unlikely to be introduced in this year’s Budget
WITH just €8 million now being collected on average each month from residential stamp duty, the case for replacing the current regime with a new property tax may never have been stronger. However, whether the political will exists for introducing a new tax on an already over-extended electorate remains to be seen.
With increasing taxes on everything on the table for this year’s Budget, there has been much speculation that a revision of the stamp duty regime will lead to the introduction of a new property tax system.
While industry players such as Marie Hunt, director of research at CB Richard Ellis, now deem a move in this year’s Budget as “unlikely”, given the amount of preparatory work that would be needed before such a tax could be introduced, signs nonetheless indicate that it could happen over the next couple of years.
Last year, the Government introduced the second home €200 levy, which was seen by some as a precursor to a full property tax.
The success of this scheme also points to the possible revenue stream afforded by taxing residential property, as it was originally estimated that the levy would bring in about €40 million a year, but last year some €65.8 million was collected, and so far this year, €57.1 million has been amassed.
Moreover, last month the Government announced its plans to establish a property price database, which will provide details of all property sales by address, sale price and date of sale, and will help provide property values on which a tax can be based.
But, given the Government’s declaration that it doesn’t intend to introduce a property tax, Marian Finnegan, chief economist with the Sherry FitzGerald group, says that her instinct is that property tax is not on the agenda at present.
“The biggest difficulty is the political issue – it would be seen as not acceptable to a large proportion of the population,” she notes.
Nonetheless, Finnegan concedes that given the dramatic slump in stamp duty revenues, a property tax makes “phenomenonally good sense for Ireland”.
While a significant source of revenue for the Exchequer during the boom years, stamp duty has now pretty well dried up. Back in 2006, some €1.3 billion was collected, but in the year to July, stamp duty has yielded just €57 million.
Accordingly, the Commission on Taxation last year suggested that “a rebalancing of the existing tax system to provide for a more stable tax base is desirable” – hence the preference for an annual property tax, which, it has been estimated, would bring in about €1 billion each year.
If property tax is introduced, then stamp duty is likely to be zero rated for home owners.
So, for someone looking to purchase a house valued at €600,000, under the current stamp duty regime they could expect to fork out €33,250 to the Revenue Commissioners.
If a property tax is introduced however, instead of paying a charge on buying a house – and thus increasing their transaction costs – they could incur an annual charge of about €1,300, or €39,000 over 30 years.
If the tax is introduced, it won’t be the first time that Irish residents have had to pay a charge on property, as a previous tax, which ran from 1983 to 1997, was based on the market value of residential property and was charged at a rate of 1.5 per cent.
However, in practice, the tax applied to very few people, as it was based on relatively high exemption limits.
This time around, the tax is expected to be much broader, with few exceptions, and will be based on the market value of a property.
As such, the cost of the tax is expected to range from between €188-€250 a year for houses worth less than €150,000, rising to close to €4,000 for houses valued at between €1 million-€1.5 million.
However, implementing such a wide-ranging tax is not without difficulties, hence the belief that it won’t happen in the short-term.
One of the major difficulties with such a scheme is its administration, and as such, it is expected that the scheme will be self-assessed, so it will be up to individual homeowners to get a valuation carried out on their home.
How it's done in Europe
WITH the pressure on to fill the Government's coffers, the introduction of a property tax is being looked at as a possible mechanism to boost tax revenues.
But given that Ireland already has significant property charges in the form of stamp duty, how would Ireland compare with its European counterparts if a property tax was added too?
Across Europe, property is largely taxed in two different ways - either on the transaction, which is akin to our stamp duty regime, or as an annual tax on the property, which may be on the agenda for Ireland.
In the UK, a stamp duty regime is in place, but the rates are a lot less onerous than the current system in Ireland. Property valued at between £125,000-£250,000 for example incurs a rate of just 1 per cent, rising to 5 per cent for properties above £500,000 from April 2011. While the UK may not have a property tax, it does have local council taxes, which vary depending on the value and location of the property.
As a comparison therefore, the purchase of a €450,000 property in Ireland will at present incur a stamp duty charge of €22,750. In the UK on the other hand, a £450,000 (€551,057) property will result in a bill of £13,500 (€16,294).
However, the Irish stamp duty regime does favour first-time buyers, who are exempt from the duty, regardless of the value of the property which they purchase. In the UK, there is a limit of £250,000, above which first-time buyers must pay the duty.
Other jurisdictions such as France levy a tax on both transactions and annually on the property. According to John Crawley, chief executive with French property consultants OuiCanDo, for those purchasing property in France there are "taxes going in, taxes during, and taxes on the way out".
Firstly, there is a stamp duty type charge, which is levied on transactions at a rate of about 3 per cent on new property, and 7 per cent on second-hand property.
So, the purchase of a second-hand property worth about €450,000 in France will incur a stamp duty charge of €31,500, and on top of this, owners of French property must also pay the annual tax.
There are two types of annual taxes in France, a taxe fonciere, which differs from region to region but can cost about €1 per sq metre per month, and a taxe d'habitation, which is a similar charge, but if the property is rented, the cost is borne by the tenant.
Unlike what is being proposed in Ireland, the French property tax is based on property size, rather than property value, so for the average Irish semi-detached home of 100sq m, applying the French system would see an annual property tax of about €2,400 being levied. This is considerably more than the €563-€675 annual charge proposed by the Commission on Taxation for a house valued at about €250,000.
Moreover, France is one of the few remaining European countries to levy a wealth tax, at a rate of between 0.55 per cent to 1.8 per cent on properties valued at over €790,000.
Similarly in Germany there are two charges, but Martin Golden, managing director of Insight Property, notes that property transfer charges are "considerably cheaper in Germany" than Ireland.
For example, Germany's version of stamp duty, the real estate transfer tax (RETT), is levied at a rate of 3.5 per cent, rising to 4.5 per cent in Berlin. So, on a property valued at €450,000, outside of Berlin the stamp duty charge would be €15,750.
There is also an annual property tax however, which is levied at 1-1.5 per cent, dependent on the location of the property.
So, this could add €2,500 a year on a €250,000 property.
In Spain, transfer fees are payable at between 6-7 per cent of the purchase price, with an additional stamp duty at rates ranging from 0.5-1.1 per cent for second-hand properties.
Local property taxes also apply in Spain, based on the rateable value of the property, which may be less than market value, at between 0.4-1.1 per cent.
Given that the introduction of a property tax in Ireland would likely lead to the abolition of stamp duty, at least if the Commission on Taxation's recommendation is adhered to, Ireland would likely stack up well against its European neighbours, although for those less likely to buy and sell, the UK stamp duty regime may be preferable.
