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.
Worth is best understood as a subjective assessment of the advantages of property to a person or company based on the perceived benefits of ownership at a particular time and for a particular purpose.
This may not be the same as value, and can differ considerably depending on a person’s circumstances.
Market value is more subjective, and in a normal market would be calculated based on transactions and other comparable evidence. Market value will factor in the fundamentals such as property size and features, location and local authority services, including access to community amenities and transport links.
While professional and registered valuers are experienced in calculating market value, the normal householder is unlikely to be, and this could have significant implications for the level of revenue generated for the Government by the property tax using this methodology.
If the Government does decide to introduce a property tax based on market value, it needs to clearly define “market value” and a procedure for market value to be self-assessed independently and professionally.
Furthermore, if there is to be some form of auditing the assessed market value for the property, which could be contested, a form of evidence or a valuation report could be necessary. If valuation professionals do become involved, it is important that the valuations are carried out in accordance with international valuation standards.
The longer-term effect of increases in property values should also be considered. We are already seeing signs of stabilisation of property in certain urban areas and if there are any increases, the likelihood is that the divide between urban and rural in terms of the property tax could increase further. At a time when we are trying to increase foreign direct investment, boost competitiveness and create jobs, the effect of a perceived urban property tax could be significant.
The question of who pays the property tax is also a contentious issue.
Currently, the property owner is liable for the household charge or “interim” property tax. However, it could be argued that it is the occupier and not the owner who benefits from the local authority services that the property tax will fund. While it is likely that making the owner liable will assist with the collection of the tax, according to international precedents including the UK council tax system, which has been in operation for many years, the liability for the tax rests with the occupier.
How the property tax will be recovered should also be factored in. It is important in the interests of equity to avoid a situation whereby people who pay end up subsidising those who refuse to, or where it becomes uneconomical to recover the tax due to exorbitant legal fees.
It is important the methodology used for this tax is as equitable and transparent as possible.
Roland O’Connell is a chartered surveyor and president of the Society of Chartered Surveyors Ireland. scsi.ie