Member News

IPTI | Update on Property Tax Issues: July 2020

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes in the USA and Europe. IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).

USA

New York: Another Coronavirus Casualty: NYC Property Tax Reform

The dwindling momentum for NYC property tax reform is being exacerbated by the coronavirus crisis and adjacent economic disaster, according to a recent report in the Gotham Gazette. An advisory commission convened by the Mayor and the City Council to assess and reevaluate the city’s “confusing and unfair” property tax system released its long-awaited recommendations back in January, but the growing pandemic stalled the intended community conversations and legislative proposals to follow.

Initially formed as a next-ditch effort to address what many see as an antiquated, opaque, and inequitable jumble of assessments and levies that overburden lower-income communities and communities of color, the Advisory Commission on Tax Reform is now in a holding pattern while city and state officials grapple with issues of logistics, prioritization, and a virus-fueled financial crunch.

However, as the Gazette indicates, the communities hit hardest financially and health-wise by COVID- 19 are also disproportionately taxed in the current system. According to the report, “Homeowners in some of the city’s most booming neighborhoods have among the lowest effective property tax rates, as do some of the most expensive co-ops and condos, while homeowners in places like the Bronx and Staten Island, which have not seen rapid gentrification, pay a much higher percent of their property’s value in real estate taxes. Tenants often serve as a release valve for the high taxes on large rental buildings.”

The January recommendations focused on inequities in the assessment of one- to three-family homes, small rental buildings, and cooperatives and condominiums, sparking a range of reactions around the real estate industry. The first of a series of public hearings was set to take place in Staten Island on March 12, but with the pandemic taking hold in New York and surrounding areas at that time, the session was cancelled.

And now, with the city’s budget filed on July 1 and a $9 billion budget deficit looming, expedient reforms to the system that garners such a large percentage of city revenue—35% for the current fiscal year, according to recent estimates—are not likely. New York City “relies on property taxes to fund the essential city services like hospitals and our first responders,” says Laura Feyer, a spokesperson for Mayor de Blasio, pointing to the conundrum in addressing a burdensome property tax system during a pandemic.

The Mayor himself echoed that proposition on May 10 to reporters who asked about property tax relief for struggling homeowners and landlords: “Especially since we don’t know what’s going to happen in Washington,” said de Blasio, “we right now are absolutely dependent on whatever resources we can get, and property tax is a part of it for sure.”

On the other hand, New York City fiscal watchdogs and reform groups say that the pandemic has made addressing inequities in the property tax system is more important than ever, and a growing chorus of landlords, tenants, and business owners are calling for property tax relief as the economic fallout knocks on their doors. “The time should not be wasted,” wrote Andrew Rein, executive director of Citizens Budget Commission, a nonprofit watchdog, in an email to Gotham Gazette. “The Commission’s report was a solid start to comprehensive reform.”

Similarly, Martha Stark, former finance commissioner under Mayor Michael Bloomberg who now serves as policy director of the advocacy group Tax Equity Now, said in an interview, “Given that the city’s only mechanism for raising revenue is going to be through the property tax, I don’t know how much more urgent it could be to ensure the taxes are done in a way that is fair and that is really reflective of people’s values.” (Tax Equity Now has sought to reform the tax system through the courts; it filed a lawsuit against the city and state that was a catalyst for the formation of the advisory commission in the first place. That lawsuit was dismissed in the appellate division earlier this year, according to the Gazette, but the group is filing an appeal in the state’s highest court.)

However, changing New York City’s property tax scheme requires action at both the city and state levels. Over the past 40 years, the Gazette notes, conflicting interests in those arenas have put a wrench into any meaningful reform. Now, while the city strains to shore up its budget, the state has put property tax reform on the back burner. “Property tax reform is not the issue we are dealing with this year,” said State Senator Brian Benjamin, a Manhattan Democrat and chair of the Committee on Revenue and Budget, on a recent podcast. “At this point we are really dealing with the COVID crisis.”

California: 10% of Landowners Will Pay 92% of New Property Tax Revenue, Prop. 15 Supporters Say

A new report from supporters of a November ballot measure aimed at increasing property taxes on commercial and industrial property in California finds that more than 90% of the additional property tax revenue Proposition 15 would generate will come from just 10% of the highest value properties.

The measure would amend the California Constitution to create a so-called “split roll” by reforming the 1978 measure Proposition 13, which slashed property taxes across the state and placed a limit on annual tax increases for both residential and commercial property.

Prop. 13 was sold as a way to create stable and predictable property tax bills, especially for seniors on fixed incomes. But critics have long complained that large corporations have unfairly benefitted from those protections, allowing them to keep assessed property values at well below market rates, resulting in a loss of revenue to schools and local government.

Prop. 15, which is financed primarily by the California Teachers Association and other unions, could generate a net increase in revenue between $6.5 and $11.5 billion dollars a year, with 40% of that going to K-12 schools and community colleges, and 60% going to local governments. The range of revenue estimates relates to growth in the real estate market.

The Schools and Communities First campaign, which collected signatures to put Prop. 15 before voters, exempted properties valued at $3 million or less, a change from an earlier version that was intended to allay fears of small businesses that they would be walloped by unaffordable property tax increases. Those properties will not be reassessed unless they belong to a landowner whose combined properties add up to more than $3 million in value.

“Nearly 50% of the revenue raised by the measure will come from properties that have not been reassessed since before 2000,” said Tim Gage, a former director for the California Department of Finance whose Blue Sky Consulting Group conducted the study for the Yes on 15 campaign using assessor’s property tax data provided by the University of Southern California.

The report found that after accounting for exempted properties valued at under $3 million, properties valued at $5 million and more would generate more than 84% of the new revenue. Those properties are highly concentrated in places like San Francisco and Silicon Valley with high value commercial and industrial property that hasn’t changed hands or been reassessed in many years, Gage said.

Critics, including John Kabateck, California director of National Federation of Independent Business (NFIB), which advocates on behalf of small businesses, called the report a “veiled attempt to pull the wool over taxpayers and voters eyes.”

Kabateck, and opponents of Prop. 15, said the final version of the measure would still end up harming many small businesses.

“They talk a lot about the exemption and the small businesses aren’t hurt and that they’re really just attacking the big guys, the big corporations,” Kabateck said. “What they fail to mention is that the majority of small business owners, upwards of 80%, rent their property. That cost is passed on directly from property owners.”

The Yes on 15 campaign responds that if a majority of the property is occupied by small businesses, the reassessment would be deferred until 2025-26. Gage also noted that landlords who have benefitted from artificially low property taxes have likely not passed those savings along to their tenants.

Prop. 15 would leave property tax increases for homeowners untouched, and it generally exempts agriculture land from being reassessed. However the California Farm Bureau is opposing Prop. 15, saying protections for growers aren’t ironclad and could end up raising their property taxes.

Conceived well before the COVID-19 pandemic and resulting recession, it’s unclear how Prop. 15 along with high unemployment will affect voters’ appetite for higher taxes on businesses.

In addition to unions, a wide array of Democrats are supporting Prop. 15, including former Vice President Joe Biden, Sen. Kamala Harris and several other former presidential candidates and members of Congress.

Opponents include the California Business Roundtable, the Chamber of Commerce and the California Taxpayers Association.

The measure will appear on the November 3 ballot.

California: County Assessor’s 2020 Assessment Roll Reflects Pre-COVID Market Conditions

Los Angeles County Assessor Jeffrey Prang certified the 2020 Assessment Roll, reflecting economic growth and an increase in the assessed value of all taxable real property and business personal property countywide.

The 2020 Assessment Roll (Roll) grew by $95.9 billion (or 5.97%) over the prior year to $1.7 trillion in total net value. In addition to the values of the County’s 2.38 million real estate parcels, this total amount reflects $87.9 billion in business personal property, which includes boats, machinery, equipment and aircraft.

The $1.7 trillion total net value translates into about $17 billion in property tax dollars for vital public services such as public education, first responders and healthcare workers, as well as other County services.

The Roll is the inventory for all taxable property in the County and, as such, can provide some insight into the health of the real estate market. Although there was a slowdown in sales, there was continued growth in property values. The Roll is also driven in large measure by real property sales, which added $49.6 billion to the Roll as compared with 2019; the CPI adjustment mandated by Prop. 13, adding an additional $30.8 billion; and new construction added $13.4 billion.

Assessments are based on the value of property as of the lien date of January 1, 2020, which was a couple of months prior to the outbreak of COVID-19 and there is a strong indication that the next year’s lien date may tell a different story.

“Although the 2020 Assessment Roll reflects steady growth, which is good news, it’s important to remember this report is pre-COVID-19,” Assessor Prang said. “It’s still too early to tell how the pandemic will affect our economy but we already see early indications that our growth may be slowing next year, especially for commercial and industrial properties.”

This year’s 5.97% increase eclipsed the official May estimate, which was anticipated at 5.25%. The increase was driven in large measure by the availability of significant production hours that normally would have been spent on assessment appeals, which have been suspended since March.

“I am pleased to report that the 5.97% increase in assessed property values in Los Angeles County represents 10 years of consecutive growth,” Assessor Prang said. “We continue to improve our ability to produce a fair, accurate and timely Assessment Roll, which is aided in large measure by our new, enhanced technology.”

However, Prang cautioned that next year is not going to be nearly as strong because of the pandemic, which has devastated the economy to levels only seen during the Great Depression. The reduction in sales tax revenue, housing market slow down and high unemployment is going to most likely have an adverse effect on the economy, Prang said.

COVID-19 also presented unanticipated obstacles to produce this year’s 2020 Roll, especially with the closure of County facilities to the public as well as the need to telework because of “Safer-At-Home” protocols.

“On any given day, we had 85 to 95 percent of our workforce teleworking.” Prang said. “The 1,400 employees here in the Assessor’s Office delivered a fair, accurate and timely Assessment Roll, while still providing excellent public service, despite significant impediments.”

Prang also reminded residents that the growth does not mean property owners will be subject to a corresponding increase on their annual property tax bills. Nearly 9 out of 10 property owners will see only the modest 2 percent adjustment prescribed by Proposition 13.

Among the benchmarks set by the 2020 Roll is the total amount of $654 million in tax savings for seniors, veterans and charitable organizations.

The 2020 Assessment Roll comprises 2.58 million real estate parcels and business assessments, including 1,882,121 single-family homes, 250,089 apartment complexes, 247,562 commercial and industrial properties and more than 205,000 business property assessments.

Colorado: What to expect if Gallagher Amendment is repealed

The November vote will have a profound effect on commercial and residential property owners.

While the repeal of the Gallagher Amendment would be a welcomed change for commercial property owners and developers, it comes with other societal impacts and increased financial burdens on homeowners. Nevertheless, in light of current circumstances, those burdens seem relatively small compared to the alternative.

Gallagher Amendment background

Originally added to Colorado’s constitution in 1982, the Gallagher Amendment sought to curb snowballing residential property taxes. It mandated that, regardless of the total amount of collections, state property tax revenue be comprised of: (1) 45% residential property taxes, and (2) 55% non- residential property taxes. To achieve this 45/55 split, the Gallagher Amendment set the commercial property assessment rate at 29% of market value, while the residential property assessment rate, originally set at 21% in 1982, would adjust to satisfy the 45/55 split.

Today, as a result of these mechanisms and a dramatic rise in residential property values across the state over the last 38 years, the residential property assessment rate has fallen to just 7.15% of the market value for such residential property. Accordingly, Colorado homeowners now enjoy some of the lowest property tax rates in the United States, while commercial property owners pay four times the property tax rate of residential properties, some of the highest property tax rates in the country.

Communities across Colorado have continued to see increased need for public services arising from population growth, juxtaposed with declining property tax revenues. As the aggregate market value of residential properties increase, the residential property assessment rate has needed to be continuously lowered to satisfy Gallagher’s 45/55 split. Although residential properties now make up approximately 80% of all market value in the state, they collectively comprise only 45% of the state’s property taxes. For that reason, many parts of Colorado find themselves severely underfunded – particularly rural communities that have not seen the same housing market boom as the Front Range.

As another consequence of the Gallagher Amendment, local governments may be less inclined to approve residential projects as compared to  commercial or industrial projects. Residential development contributes relatively little in property tax revenue and can even be viewed as an additional cost burden on already underfunded local governments. And, as the continued shift to online retail diverts the receipt of critical sales taxes, local governments will find themselves in increasingly dire revenue circumstances.

These effects are now exacerbated by a global pandemic that is threatening to send the market value of commercial property plummeting. Any such crash in commercial property values would necessitate a drastic reduction in the assessment rate for residential properties, thereby substantially reducing the state’s total property tax collections. Current predictions estimate that this reduction in tax revenues could reach $500 million.

The other side of this coin is that, once the assessment rate for residential properties falls, it will be very difficult for it to be raised back to pre-pandemic levels, as a tax increase would require a vote of Colorado residents under the state’s other seminal tax limiting constitutional amendment.

These factors are the driving force behind the proposed repeal of the Gallagher Amendment.

Repeal and implications for residential and commercial property owners in Colorado

In June, the repeal proposal gathered the requisite number of votes from Colorado legislators to be placed on the November ballot. There is considerable uncertainty surrounding the potential repeal of the Gallagher Amendment, as repealing it will require a simple majority of voters and it is unknown what assessment rates or scheme would fill its void.

If the Gallagher Amendment is not repealed, commercial property taxes are sure to increase. As residential property values continue to rise, the residential property assessment rate is now projected to drop to 5.88% if the Gallagher Amendment isn’t repealed. The future for commercial property owners looks bleak, as they will pay almost five times the residential assessment rate in the next year.

The repeal may be coupled with a moratorium on changing the assessment rates, as a separate bill (SB 20-223) contemplates just that. If enacted, it would lock in residential assessment rates at 7.15% and commercial assessment rates at 29%. This option would stave off additional cuts to the residential assessment rates. Importantly, such a freeze would also shelter commercial properties from increased property tax payments (due to the potential for an increase in the residential property assessment rate following a repeal of Gallagher). Nevertheless, this option would not immediately level the disproportionate assessment rates and residential properties would still be paying one-fourth of the assessment rate of commercial properties — meaning rural communities would certainly still be underfunded. The benefit here, at least for commercial property owners and developers, is that the situation would not continue to get worse, as it has for so many years.

If the Gallagher Amendment is repealed but no freeze is implemented, the state legislature could adjust assessment rates, subject of course to voters approving such a measure. This would likely mean an increase in residential property tax rates to bolster state property tax collections. In this circumstance, even if commercial property assessment rates remain the same, the result would be a more equitable split in property tax burden. Small businesses could be protected from increased rent due to triple net leases, which pass through tax payments to tenants. In any event, it would all be up to the legislature, which Coloradans have historically been reluctant to trust.

The repeal could lead to other factors that impact real estate development. For instance, the increase in tax revenue in communities would lead to subsequent improvement of local services provided by local governments, such as fire and police protection, and additional school funding. This, in turn, should make underserved and rural communities more attractive places to live, thereby presenting additional development opportunities to support Colorado’s continued growth. In the absence of Gallagher, local governments may also be more inclined to approve residential development where they previously chased commercial and industrial uses as a result of revenue consequences.

However, increasing the residential assessment rate creates additional financial burdens for home owners across the state, including those living in the Front Range that are already struggling with a high cost of living. The increased tax burden will make home buying even more unattainable for low income families and force individuals further outside the metro area, leading to additional urban sprawl. The increased residential tax burden would also likely impact renters, as additional taxes are likely to increase residential rent rates. Affordable housing development may be even more challenging.

The potential repeal of the Gallagher Amendment brings a variety of possible and  long-lasting consequences for all Coloradans. Whether the repeal results in a moratorium or an adjustment in assessment rates, commercial properties are sure to benefit so long as the Gallagher Amendment is repealed. In either event, the November vote will have a profound effect on property owners.

Florida: A Property Tax Story: The Happiest Place on Earth Just Got a Lot Happier

The Florida Fifth District Court of Appeal has decided that the methodology utilized by the property appraiser to arrive at the market value for Disney’s Yacht and Beach Club is flawed.

The Florida Fifth District Court of Appeal, in the case of Singh (Orange County Property Appraiser) v. Walt Disney Parks and Resorts, ultimately decided that the methodology utilized by the property appraiser to arrive at the market value for Disney’s Yacht and Beach Club is flawed. This methodology, referred to as the “Rushmore method,” can no longer be utilized in the state of Florida. This is a big win for hotels and resorts that have a significant amount of revenue that is generated by sources other than hotel rooms.

The Rushmore method has been a topic of debate in the appraisal world for years. It’s also widely used by county/jurisdictional property appraisers around the country. Essentially, it utilizes ancillary/additional income from on-site revenue sources, such as restaurants, bars, retail stores/outlets, parking lots/garages, spas, meeting/convention space, etc., and includes it in the total revenue figure, along with the room revenue. A primary argument against utilizing the Rushmore method is that including this type of ancillary/additional income in the total revenue number would be including a business enterprise value component, which would overstate the market value of the property. For example, when attempting to establish the market value of a property for appraisal purposes that is utilized as a restaurant, the income generated from selling the food and drinks is not considered as the income factor. Rather, the income factor is established by what the real property (land, buildings, fixtures, and all other improvements to land) would rent for, established by competing, similar type properties in the market. This rental rate is typically shown as a rate per square foot of building area, say $25.00 per square foot of building area. In most instances, this rental rate per square foot of building area indicates much less of a revenue factor than the business sales figures. As such, the reduced income factor based on the rental rate per square foot of building area would indicate a reduced market value. Basically, this was the methodology employed by Disney.

Some states have judicially rejected the Rushmore method, and now Florida can be included in that group. As indicated by the appellate court opinion filed June 19, 2020 on this case, “the dispute in this case began in 2015, when Appraiser’s tax assessment of the Property increased by 118% from the previous year’s assessment.” The trial court, in the case of Walt Disney Parks and Resorts US, a Florida Corporation, Plaintiff v. Rick Singh, as Property Appraiser, et al., Defendants, Case No.: 2016-CA- 005297, concluded that the main reason for the increase in the property’s market value from the previous year was that the property appraiser included ancillary income from the sale of food, beverages, merchandise, and other goods and services on the property. The appellate court reversed the trial court’s assessment of the property value based on lack of evidence. However, it did uphold the trial court’s decision to reject the assessment/valuation methodology utilized by the Orange County Property Appraiser to arrive at the market value of the real estate for the Yacht and Beach Club property. The trial court found that the property appraiser improperly considered income from the business activities conducted on the property in establishing the market value. The appellate court opinion states that “the Rushmore method violates Florida law because it does not remove the nontaxable, intangible business value from an assessment.”

What does this mean? For certain hotels and resorts in Florida, most of whom have suffered greatly because of the COVID-19 pandemic, it could mean some much-needed financial relief is on the way, via reduced property taxes. This would certainly be the case in Orange County, other parts of the state, and possibly other parts of the country where many of these full-service and resort-type hotels exist.

EUROPE

Ireland: What’s next for commercial rates?

The present crisis presents a new government with an opportunity to rethink commercial rates

Commercial rates are a vital source of income for local authorities to fund local public services. With many businesses adversely affected by the Covid-19 pandemic and the subsequent lockdown, revenue from commercial rates for Ireland’s 31 local councils will be significantly lower this year that the €1.6bn projected in the 2020 budgets.

In March 2020, the government announced that commercial ratepayers impacted by the shutdown could apply to their local authority for a three-month rates deferral. In all likelihood, this would have resulted in some businesses ceasing their rates payments. By May, this temporary deferral of rates transitioned into a rates waiver for  ratepayers that were forced  to close due to public health requirements. At an estimated cost of €260m to be borne by the central exchequer, this decision may have to be considered again depending on the duration of the economic downturn. In England, for example, non-domestic rates were waived for small businesses for the entire 2020/21 financial year.

Rates are a recurrent annual tax on business properties. Similar to the residential property tax, rates are a local tax where the tax is assigned to local government where the rate is determined by the elected councillors. Commercial rates account for about 30% of annual local authority income, but this is not the full story. There is a large variation across local authorities with respect to commercial rates, including these four.

There is considerable variation between councils in the share of revenue which rates account for. City councils that have a large commercial base are heavily dependent on rates income, but smaller rural councils are more reliant on central government grants. In the three Dublin county local authorities, approximately half of their revenue income comes from commercial rates. In small rural councils less than one fifth of their revenue income is derived from rates. So although the shutdown negatively impacted all local authorities, the outturn will not be uniform.

Although it is difficult to compare the Annual Rate on Valuation (ARV) across the local government sector due to revaluations undertaken in some but not all councils, the difference is striking. For those councils that have undergone a rates revaluation, the ARV varies from a high of 0.2760 in South Dublin County Council to a low of 0.1732 in Dún Laoghaire-Rathdown County Council. Of the eight councils yet to undertake a revaluation, Kerry County Council strikes the highest rate at 79.25, whereas the lowest rate is levied by Galway County Council (66.59).

One of the explanations for these large cross-council differences is the variation in expenditure per capita. This ranges from a high of over €1,500 to a low of less than €600 in local council spending per person. As local governments are required to balance their adopted revenue budgets, current expenditure has to be financed from revenue income (i.e. no planned borrowing permitted to pay for day-to-day spending, unlike at central government level), with rates income as the balancing item.

Defined as the ratio of commercial rates collected to total rates for collection, the national collection rate in 2018 was 88%. Taking into account the commercial rates accrued, but also arrears, waivers, write-offs and reliefs for vacant properties, collection rates range from a high of 96% in Fingal County Council to a low of 76% in both Donegal and Laois county councils. Many councils with relatively low collection rates established debt collection units to manage and improve collection rates, with varying degrees of success. The increase in unpaid rates bills associated with the economic contraction is likely to result in an increase in debt collection services, used internally or, more controversially, outsourced to third-party private debt collectors.

Using county data, GeoDirectory publishes quarterly estimates of commercial property vacancy rates. In Q2 2019, the national vacancy rate was 13.3% (equivalent to over 28,000 vacant commercial properties), with a high of 18.9% in Sligo and a low of 10.1% in Meath. The highest vacancy rates were all in the west and north west of the country, corresponding with the most rural parts of the economy. Given the economic downturn and the short-term prospects for the business sector, the number of vacant commercial properties is expected to increase, with a knock-on effect for commercial rates and local authority income.

Aside from these cross-council variations reflecting differences in local preferences, circumstances and choices, what does this tell us? Given current economic conditions and the inevitable competing calls on a new government for business assistance and enterprise supports, what is needed is a comprehensive and urgent review of commercial rates.

When abolishing business rates in 2020/21 for small businesses in his March budget, the UK Chancellor of the Exchequer Rishi Sunak also announced a fundamental review of business rates by HM Treasury. A similar review was published in Scotland in 2017. Some of the 30 recommendations of the Barclay Review of Non-Domestic Rates that might be relevant here are a redefinition of the rates base, more regular revaluations and a business growth accelerator that would provide for a one-year holiday on investment in new machinery or business expansion.

In the Irish context, similar reviews have taken place in the last 15 years, but arguably in very different circumstances. To name but three, there was the Indecon Review of Local Government Financing in 2005, the Commission on Taxation Report 2009, and the Local Government Audit Service Overview of Commercial Rates in 2018. There was a recommendation in the 2005 and 2009 reports to widen the rates base to include certain properties, including Government buildings, educational and professional institutions with commercial outlets and certain non-State properties exempt from commercial rates.

As part of this root and branch review of rates, the Local Property Tax should also be included, so that all local taxes are considered. This time-limited analysis of the property tax should cover the method of valuation, the central and local rates, the 80/20 split, and the thorny matter of revaluations. It should also look at more substantive issues like alternatives to the tax such as, for example, a site value tax as proposed in the Green Party election 2020 manifesto. Likewise, the review of commercial rates should have a broad terms of reference to include the operation of the rating system, its overall burden on businesses and other business tax alternatives of a local nature.

Among others, consideration might be given to a local business tax with a base other than property, reassignment of motor vehicle tax (where future revenue is shared between central and local government) or a congestion tax/charge in our main urban centres. Whatever the recommendations of such a review of local taxes, the present crisis presents a new government with an opportunity to rethink commercial rates, with a view to identifying the least harmful local taxes to be levied by councils on taxpayers.

United Kingdom: Wealth tax for the UK?

While it seems that any major tax announcements are to be in the Autumn, it is important to focus on what tax changes might come.

There has been much speculation about potential tax rises, including increases to income tax and NICs (which would be contrary to manifesto promises but arguably acceptable given the unprecedented economic fallout of Covid 19), aligning capital gains tax (CGT) rates with income tax rates (there being a notable difference with the normal top CGT rate being 20% and the top income tax rate being 45%), or at the very least increasing CGT rates, and abolishing higher rate pensions relief.

In practice the reality may be an entirely new tax, a wealth tax. This week the Institute for Fiscal Studies (IFS) launched a new project investigating the desirability and feasibility of a wealth tax, and those contributing include Gus O’Donnell, former cabinet secretary, and Emma Chamberlain QC. Particularly tellingly, Mr O’Donnell commented ‘Lots of different things suggest to me that there might be more of an appetite for a (wealth tax) than you might have thought politically from a  Conservative government that came in with a manifesto that basically said no to all sorts of different tax changes’.

At the same time the launch report makes interesting reading and sets out a series of findings about the concentration and demographic spread of wealth in the UK. Notably it finds that the amount of private wealth in the UK has risen sharply since the 1980s but revenue from taxes has not kept pace with the increase in that wealth.

The report also discusses that how to tax wealth, of course, depends on the form of the wealth – a particularly sensitive issue is that the greatest wealth is in pensions and private property, both of which are highly politically sensitive from a taxation point of view. Unsurprisingly, the report finds the wealth is concentrated in some areas of the UK (notably London) and demographically amongst older generations. The big question of course is how a wealth tax would operate against that background. We saw much debate about Entrepreneurs Relief and whether taxes can or do encourage entrepreneurial business activity, equally one would need to think very carefully about the interaction of any wealth tax with existing taxes such as capital gains and inheritance tax.

It is also worth remembering that the only EU countries which still have any form of wealth tax are Norway, Spain, Belgium and Switzerland, while there are proposals by Warren and Sanders in the US for a wealth tax. It is notable that France has recently moved away from the ISF. All of which points to the importance of ensuring any discussion about a wealth tax is measured and sensible, and that the reports to be produced by the IFS, with a final paper in December, take account not only of how such a tax would work in the UK, but the importance of ensuring the UK remains competitive (now more than ever).

Meanwhile, and closer to home, while it is impossible to plan for a tax of unknown form that may or may not be enacted at some point, we do know that now is an opportune time to put in place lifetime planning and transfer assets while they are standing at low values. More than ever now is the time to consider transferring assets to trust if appropriate or other wealth transfer structures, potentially including partnerships. The present low asset values should be taken advantage of, and while we do not know what the tax landscape will look like in the Autumn, it seems pretty clear that tax rises can be expected so the summer months would be a good time to implement gifting and other lifetime planning.

‘Lots of different things suggest to me that there might be more of an appetite for a (wealth tax) than you might have thought politically from a Conservative government that came in with a manifesto that basically said no to all sorts of different tax changes’.’ Gus O’Donnell

Compliments of the International Property Tax Institute – a member of the EACCNY.