The proposed property tax will be unable to take account of swings that can occur in the market, writes CAROLINE MADDEN
THE COMMISSION on Taxation's recommendations relating to the introduction of an annual property tax sent chills down the spines of hard-pressed homeowners, particularly those who have already had to pay a huge stamp duty bill in order to acquire their home in the first place.
Reports have indicated that the Government may shelve the introduction of a recurring property tax. However, the Taoiseach Brian Cowen said earlier this week that there is an 'inextricable link between the elimination of stamp duty and the introduction of a property tax'.
The commission has proposed that stamp duty on the purchase of a person's main home be replaced by an annual property tax. Stamp duty would remain for investors in the buy-to-let market but at a lower rate. This, it says, would provide a more stable revenue stream for the Exchequer than stamp duty which, although buoyant in good times, is volatile and also creates undesirable distortions in the property market. It is seen as inevitable that sooner or later a recurring property tax will replace the current transaction-based duty.
The proposed property tax would be based on the valuation of the taxpayer's home. However, cash-poor owners of valuable property would be able to defer the tax until the home is sold. Local authority and social housing would be excluded from the net but all other homes would be liable.
In recognition of the large amount of stamp duty paid by home buyers in recent years, the commission has recommended that such individuals would be exempt from the new tax for seven years from the year in which they paid the stamp duty. For example, if someone bought a house in 2005 for €500,000 they would have paid stamp duty of €30,000, (assuming they were a first-time buyer, purchasing a second-hand home).
If the proposed property tax were to come into force in 2010, then they would only be exempt for two years, until 2012 (ie 2005 plus seven years). Assuming their house is now worth €400,000, and the Government were to set the new property tax rate at 0.25 per cent, the exemption would only be worth a total of €1,876, which is about 6 per cent of their stamp duty bill.
The proposed exemption is not intended to compensate people completely for stamp duty already paid, the commission's chairman Frank Daly said at the launch of the report on Monday. The commission has proposed that the new property tax would be self-assessed, as opposed to being directly assessed by the Revenue Commissioners. The task of correctly valuing their property falls to the property owners - though putting a value on property is extremely difficult in the current market.
The commission has tried to get around the problem by suggesting the use of wide valuation bands, which remove the need for a precise valuation. The homeowner will simply have to declare that their property is in a particular band, and then a flat charge applicable to that band is applied. For example all houses valued between €150,001 and €300,000 would be subject to an annual property tax of €563 (if a rate of 0.25 per cent applies). While the wide valuation bands get around the need for an exact valuation, they are a fairly blunt instrument considering that the tax is supposed to be proportional (as opposed to a flat rate for all homeowners).
The tax is calculated by multiplying the rate by the midpoint of each band. For example in the case above, €563 is arrived at by applying the rate of 0.25 per cent by €225,000. The effect of this approach is that people at the bottom end of each valuation band would end up paying the same tax as those at the top end, whose property is worth almost €150,000 more than theirs.
The Revenue Commissioners would be responsible for monitoring and auditing the regime, and presumably taxpayers who underestimate the value of their home, either deliberately or inadvertently, and underpay tax as a result, would be penalised. Estate agents, auctioneers and valuers stand to benefit if such a tax is introduced, as law-abiding homeowners will pay experts to ensure they are selecting the right tax band for their home.
The commission has suggested that householders who get a professional assessment of the value of their property should get a tax credit of up to €75 in the first year to compensate them for costs incurred. The proposed system is unlikely to be able to take account of the wide price fluctuations that can occur in the property market - as is the case now.
The commission has recommended that a property tax return should be filed by homeowners every three to five years. The valuation in the return would then be used to calculate the tax for the following three to five years. The valuation date could be between six to 12 months before the date for submitting the property tax return. Therefore in theory, the same valuation could be used for six years, during which time the value would definitely have changed.
Simon Ensor of the Irish Auctioneers and Valuers Institute (IAVI) says a significant issue with this residential property tax is that it 'may be perceived as an 'urban' tax, as it will be very difficult for the Revenue to establish the value of a one-off house in rural Ireland'. The introduction of a recurring tax could have unintended consequences. Homeowners would have to file interim property tax returns if 'material alterations' are made to their home. The proposed tax could deter people from improving, renovating or extend- ing their home, as this kind of work could push their property into a higher valuation.
