Fairness key to a property tax based on market value

ANALYSIS:RECENT REPORTS suggest the “full” property tax to be levied on homeowners will be based on market value and will not, as recommended by the Commission on Taxation, be based on site value. A property tax based on a “market value” methodology needs to be examined with care as it could have significant implications for homeowners.

Unquestionably, the need to broaden the tax base to fund local government beyond stamp duty in the form of a more stable and recurring property tax is crucial, if somewhat unpalatable, for homeowners.

At the peak of the property market in 2006, 14 per cent of monthly exchequer income was from stamp duty alone. As the property market declines, this has fallen to less than 2 per cent. Local authorities are starved of funding, and it is vital the property tax revenues are directed to supporting them in delivering services for the public.

Similarly, local authorities will need to demonstrate the value of services provided to the same tax-paying public.

A site value tax (SVT) is paid on the value of the land a person owns. The advantage of the site value tax is that it encourages efficient use of land and does not penalise those who wish to improve their property.

The downside to the SVT approach is that it is very difficult to value parcels of land independently of the property that sits on them. This will be a serious issue, particularly if the SVT is to be self-assessed.

For example, how does the owner of an apartment in a multi-unit development assess the value of the site their apartment is built on? In fact, there could be negative site values in certain cases.

Other proposed methodologies have included an area-based tax, whereby the tax is levied based on the size of the property. The advantages of this method include the fact that it is relatively easy to apply, is cheaper to administer and is transparent. However, it doesn’t take into account the benefits of and access to local services – which is ultimately what the tax is to fund.

What is now being suggested is that the property tax will be based on the “market value” of the property. A property tax based on market value is common in many other countries and is deemed to weight the tax more heavily towards people who are in possession of higher-value properties. Of course, this does not mean they are in a better position to pay – and some exceptions must be considered.

In theory this seems easier to determine than an SVT, but given the downturn and the severe lack of transactions on the market, assessing the market value of a property will be a challenge – particularly for non-standard properties.

Furthermore, what does “market value” actually mean? The concepts of property price, worth and market value are often used interchangeably.

Price is the actual amount that was exchanged for a property. As we know, there is a dearth of information available due to data protection legislation restricting the publication of actual property selling prices. While the new Property Price Register will go some way to alleviating this, it will take time for the information to filter through as only property sales after January 2010 will be published and there may be a time-lag between the sale date and online publication.