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Update on Property Tax Issues: IPTI report December 16

The EACC in partnership with the International Property Tax Institute (IPTI) wants to keep members up to date with the latest developments in property taxes both in the USA and Europe.

IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts. This report includes Greece, the United Kingdom, and the United States with a focus on New York. In addition, there are some brief notes about wealth tax in France and Spain along with property taxes in Austria, Italy and Germany.

Greece: Added value tax on Greek property transactions reappears in 2017 budget

While insignificant amid the ongoing and continuing “tax tsunami” that menacingly unfolds in the draft 2017 budget, roughly 24 million euros is booked in the budget from a resurgent added value tax on real estate transactions

While insignificant amid the ongoing and continuing “tax tsunami” that menacingly unfolds in the draft 2017 budget, roughly 24 million euros is booked in the budget from a resurgent added value tax on real estate transactions — a surcharge that was first imposed in 2014 but completely flopped in the implementation phase and was later suspended.

The previous alternate finance minister, in fact, had insinuated that the tax would not be revived in 2017.

Nevertheless, the figure of 24 million euros was compiled on the draft budget, meaning that the finance ministry must either proceed with its implementation, which would add yet another tax to property transactions in market still frozen solid by the economic crisis, or proceed with the tabling of an amendment to again suspend the tax for another year.

As stipulated in the original legislation, the added value tax is paid by the seller, and is calculated with a 15-percent coefficient on the difference between the current sale price of the property minus the original acquisition price by current seller.

Implementation of the tax two years ago was a resounding failure. Beyond the fact that the unprecedented economic crisis had smashed real estate values, notaries, tax offices and real estate agents could not agree on how to calculate the tax.

Those same deficiencies remain in the current, albeit suspended, law.  

Greece: Greek government eyes major overhaul of property tax regime after 2018

Greece’s finance ministry is working on a draft proposal to replace the current property tax (ENFIA) with a new framework 

Greece’s finance ministry is working on a draft proposal to replace the current property tax (ENFIA) with a new framework that will include all real estate assets in the country, including rural land and all types of structures.

According to reports, the new property tax framework will not have a tax-free ceiling and will be based on a progressive scale. If the plan actually materializes, then the property tax in its current format will be imposed in 2017 for the last time.

One significant parameter in any ENFIA revision will be to reduce the current objective tax criteria — used by the state to impose yearly tax rates on property — and bring rates more in line with commercial prices, which have collapsed almost across-the-board since the economic meltdown began in 2010. This revision in the framework is also a memorandum-mandated obligation and must be completed by the first half of 2017, although delays — attributed to “technical issues” — point to its completion in the second half of the coming year.

A paradox in the country at present reveals that objective tax criteria in some areas exceed commercial values by as much as 50 percent.

The revenue goal for 2017 remains at 2.65 billion euros, a figure that has little room for deviation in subsequent years amid the quite ambitious fiscal targets demanded by creditors, such as the 3.5-percent primary budget surplus as a percentage of GDP in 2018. As such, a newly unveiled property tax revisions will have to ensure a similar revenue target.

Property Tax in Italy

Property tax (imposta comunale sugli immobili/ICI – pronounced ‘itchy’) is paid by everyone who owns property or land in Italy, whether resident or non-resident.

It’s levied at between 0.4 and 0.7 per cent of a property’s fiscal value (valore catastale), the rate being decided by the local municipality according to a property’s size, location, age, condition and official category (categoria), as shown in the property deeds (rogito). Categories are decided by the land registry (catasto) according to the type of property (abitazione di tipo) as follows:

A/1 – Signorile (refined)

A/2 – Civile (civilian)

A/3 – Economico (economical)

A/4 – Populare (working class)

A/5 – Ultrapopulare (‘ultra-working class’)

A/6 – Rurale (rural)

A/7 – Villini (small detached)

A/8 – Ville (detached)

A/9 – Castelli, palazzi di eminenti pregi artistici o storici (castle or building of eminent historic or artistic importance)

A/10 – Uffice e studi privati (private offices and studios)

A/11 – Allogi tipici dei luoghi (typical housing of the region)

A property’s category has a relatively small influence on the amount of tax payable. If a property is unfit for habitation, property tax is reduced by 50 per cent.

Property tax is usually paid in two instalments: 90 per cent by 30th June and the remaining 10 per cent between 1st and 20th December (for uninhabitable properties, the figures are 45 per cent and 5 per cent respectively). If it isn’t paid on time, you can be fined in the form of a surcharge or additional tax (sopratassa) of up to 200 per cent of the amount due.

The form for paying tax is complicated and many people (particularly foreigners) employ a commercialista or agent to do it for them. You can also pay property tax from abroad using registered post, addressing payment to the tax office of your comune. Payments must be up-to-date when a property is sold and you should check this before buying.

Other property-related taxes include communal services (servizio riscossione tributi ruoli) for owners of condominiums and other community properties, refuse tax (tassa communale dei rifiuti) and water rates. Property owners also pay income tax on their property, which is based on its cadastral value.

Property Tax in Germany

Real Property Taxes in Germany

Every property owner has to pay property taxes in Germany. He is liable to pay real property taxes (so called “Grundsteuer”). The tax rate depends on the type of real property. This is sorted into two distinct categories:

Real property tax “A”: Real property used for agriculture and forestry.

Real property tax “B”: Constructible real property or real property with buildings.

Real Property Tax Rate

The real property tax burden is calculated by multiplying:

  • the assessed value of the real property
  • the real property tax rate
  • the municipal multiplier

The assessed real property value is determined by the tax authorities according to the German Assessment Code (Bewertungsgesetz). The German Assessment Code refers to historical property values that are usually significantly lower than current market value. 

The real property tax rate depends on the type of real property. The tax rate is e.g. 2.6‰ (0.26 percent) for property used for (semi-) detached houses with a value of up to EUR 60,000 and 3.5 ‰ (0.35 percent) for all remaining types of real property (including commercially used real property).

Similar to the municipal multiplier applied in the trade tax case, the municipal multiplier applied to real property tax is stipulated by each municipality. Municipalities determine a municipal multiplier for both real property tax “A” and real property tax “B”, with the rate for “B” usually being higher.

Determining Burden of Property Taxes in Germany

Real property tax burden for a commercial building in a municipality with an average real property tax “B” rate of 350 percent:

Assessed Value EUR 1,000,000 x Basic property tax rate x 0.35 percent x Municipal multiplier “B” x 350 percent = Property tax burden = EUR 12,250

Real Property Transfer Tax

When domestic real estate is sold or changes owner, a one-time real property transfer tax (Grunderwerbssteuer) of the purchase price is levied if the purchase price or consideration exceeds EUR 2,500. Real property transfer tax is usually paid by the buyer. The tax rate varies from federal state to federal state. Please see the table below for more information.

 

Real Property Transfer Tax Rates in the Respective Federal States 2015:

3.5%      Bavaria, Saxony

4.5%      Hamburg

5.0%      Baden-Württemberg, Bremen, Mecklenburg-Vorpommern, Niedersachsen, Rheinland-Pfalz, Saxony-Anhalt, Thuringia

6.0%      Berlin, Hessen

6.5%      Brandenburg, North Rhine-Westphalia, Saarland, Schleswig-Holstein

Real property transfer tax also applies to a real property-owning partnership if 95 percent of the shareholders change within five years. 

France and Spain – Wealth Tax

Wealth tax in France is imposed on the total value of residents’ worldwide assets where their taxable wealth amounts to over €1,300,000, though only the first €800,000 is not taxed.

Wealth tax in Spain was reinstated in 2011 and is still in place. Each resident individual receives a tax free allowance of €700,000 plus a €300,000 allowance on his own home. It can be an expensive tax for those unprepared for it.

You need to understand how the French and Spanish wealth tax rates, rules and allowances might impact you. It is important to structure your assets in the most effective manner to mitigate the wealth tax, as well as the other taxes in these countries.

Property Tax in Austria

Both national and local governments tax property on an annual basis. The tax is based on an assessed and registered value. The federal rate is typically 2% of the registered value of the property. The local government can increase this by up to 500% (i.e. if the federal rate is 2%, the local government rate can be up to an additional 10%, making 12% in total. As these figures can vary widely, it’s important to make sure you understand the costs for the area you’re interested in buying in.

United Kingdom: UK has highest property taxes in developed world

The squeeze by the Government on home owners and business premises means Britain has the highest property taxes in the developed world, it has been revealed.

Analysis by the Organisation for Economic Co-operation and Development (OECD) shows property taxes accounted for 12.7pc of the total tax burden in 2014, the latest year for which data are available. This is up 0.3 percentage points compared with 2013 and is more than a percentage point higher than in 2011.

It means levies on property as a share of total taxation are higher in the UK than anywhere else in the developed world. At 5.6pc, the average among the OECD’s 35 members is less than half the UK figure.

Britain is also bucking international trends. Since 1965, the international average has fallen from around 8pc, while the UK Government has increasingly relied on property taxes for its income. Property taxes now account for more than 10pc of total tax revenue in just four other countries apart from the UK: Australia, Canada, South Korea, and the US.

In 2014, UK taxes on residential and commercial property, including stamp duty, inheritance tax and business rates, jumped to £74.2bn in 2014, up from £69.8bn a year earlier.

The increase pushed up levies both as a proportion of the Government’s total tax take and national economic output, with property taxes now representing the highest share of the tax burden in at least 35 years.

Revenues from stamp duty climbed to 2.4pc of the UK’s total tax take in 2014, from 1.62pc in 2011, the OECD’s latest revenue statistics bulletin says.

Property taxes are equivalent to 13pc of GDP in the UK, against 3.9pc of GDP in France, 2.8pc in the US and 1.9pc across the OECD.

While the former Conservative Chancellor of the Exchequer, George Osborne, took steps to reform property taxes, research has shown that changes have slowed the housing market and raised half as much money as the Treasury predicted.

Many companies have warned about the negative impact on the economy of Britain’s sizeable business rates bill, which has grown from being the seventh largest revenue raiser for the Treasury in 2010 to the sixth largest today, amid a prolonged freeze in fuel duty.

The rising tax burden on British property owners appears to be benefiting renters in the London market, at least briefly. New figures show more properties have been made available to rent after the stamp duty rise in April. In London, buy-to-let landlords rushed to beat the increase by purchasing more properties before the deadline.

Johnny Morris, research director at Countrywide, said: “Higher than usual numbers of homes available to rent have boosted tenants’ negotiating power. Stock growth has outstripped that of tenants.”

United Kingdom: UK move to cut business rates to boost fibre roll out ‘could change investment case for operators’

Experts have broadly approved the UK government’s announcement of business rate relief for companies that commit to building new fibre networks.

As part of the Autumn Statement announcement, Chancellor Philip Hammond promised to introduce 100 percent business rates relief for a five-year period starting from next April on pure fibre infrastructure.

This built on the pre-announced plan to commit £400 million to a new Digital Infrastructure Investment Fund that aims to drive deployments of FTTP/H-based networks.

Hammond said: “We have chosen to borrow to kick-start a transformation in infrastructure and innovation investment.

“But we must sustain this effort over the long term if we are to make a lasting difference to the UK’s productivity performance.”

Alex Holt, Partner and Head of Technology, Media and Telecommunications, KPMG UK, said the announcement was designed “to change the investment economics for operators”.

“As always, the devil will be in the detail, but today’s announcement is likely to be an important consideration for a number of network operators when planning their fibre strategies for the next few years,” Holt said.

“These operators will be looking for clarity from the government on what the announcement means in practice, and this will need to be provided quickly if the government’s goal of changing investment plans is to be achieved.”

He added: “The private sector will provide the vast bulk of the investment required to upgrade our mobile and fixed networks, but the economics don’t work quickly, or everywhere in the UK for that matter.

“The Government can and should continue to step-in, to fill the gaps and to further incentivise investment in strategic technologies like fibre and 5G mobile networks if the UK to be a leader in ultrafast fixed and mobile communications.”

James Thompson, Head of Business Rates at Deloitte Real Estate, said the announcement would remove one of the major barriers to fibre deployment.

“We would expect the speed of roll-out delivery to be increased as a result of this relief,” he commented.

“It is however disappointing that similar relief will not be given to the roll-out of new wireless broadband in rural areas.”

It is the second major announcement on business rates in the space of two months.

The industry warned prices could rise in September, when the UK’s Valuation Office Agency (VOA) announced a fourfold rise in business rates on some major infrastructure providers’ bills.

The total rateable value of telecommunications fibre and cable networks, excluding national networks, went up from £141 million to £421 million as a result of the VOA’s decision, according to Deloitte analysis.

Richard Hooper, Chair of The Broadband Stakeholder Group, said at the time that this “huge increase” went against the government’s objective to support “world-class connectivity” and introduced “instability and risk”.

Commenting on the Autumn Statement decision, Hooper said it was “a welcome move”.

Adrian Baschnonga, Global Lead Telecommunications Analyst at EY, concluded: “News of the business rates relief will be welcomed by service providers, who had previously voiced concerns over a prospective hike and its impact on network investment levels going forward.

“The rate relief is an important complement to the £400 million investment fund, and will help incentivise the rollout of ‘full fibre’ infrastructure as part of the UK’s long-term digital growth plans.”

United Kingdom: stark contrast between business rates for Steel Works

In the past 18 months, more than 5,000 steel jobs have been lost, with major events including the collapse of SSI in Redcar, Caparo going into administration, and Tata putting its UK operations on the block.

Britain’s steel industry remains in crisis as it buckles in the face of competition from state-subsidised Chinese imports, high energy costs and a less favourable property tax regime than enjoyed by European rivals.

Steel industry bosses and unions have long warned that a toxic mix of high business rates, rising energy and environmental costs, and the lack of a state-backed industrial policy are threatening Britain’s much-vaunted manufacturing renaissance.

So will the recent business rates revaluation help the situation?

The Government has now adjusted the Rateable Values of every business property in England and Wales to reflect changes in the property market. The new Rateable Value will be used to determine the basis of the tax calculation for rates next April.

The revaluation of business properties usually happens every 5 years but was controversially delayed by 2 years as a result of the economic downturn. The last revaluation came into effect on 1st April 2010 based on the property market as long ago as 1st April 2008.

What is a business rates revaluation?

The purpose of a business rates rating revaluation is to achieve fairness by ensuring that tax liabilities are based upon up-to-date rental values. As a consequence, revaluations create ‘winners’ and ‘losers’ as ratepayers’ liabilities are shifted in line with relative movements in property values since the previous revaluation.

Those whose properties have performed better than their peers – by dint of the quality of their property, location or business sector – since the previous revaluation can expect to see their bills rise. Equally, those whose properties have underperformed can expect to see their bills fall.

Business rates for construction sites in Wales set to fall by over 20%

In Wales, where property taxes such as business rates are devolved, the Welsh Government has signalled that there will be no cap on downward tax movements, i.e. no transitional relief scheme, other than for those ratepayers whose eligibility for small business rate relief is affected as a result of the revaluation of properties.

The upshot is that the Steel industry in Wales will see the full and immediate benefit of falling rateable values next year. According to CVS business rates specialists, Tata Steel at Port Talbot has seen their property assessment fall from £20.9m to £16.88m- a 19% drop.  This year the site paid £10.16m in business rates but, from April next year, CVS projects that will drop to £8.42m.

CVS surveyors also suggested that across the 5 main Steelwork sites in Wales, rateable values have fallen from between 16% to 29%, and the total rates payable, i.e. the business rates bills, will fall next April by a quarter from £16.64m to £13.26m.

However, in England, the picture is very much different.

Transitional Relief in England

The problems caused by 5, and recently 7, yearly revaluations are aggravated further for some by the impact of Transitional Relief.

The Transitional Relief scheme exists to cushion and phase in increases in bills for those ratepayers who would otherwise see significant increases in their rates liability. This relief is paid for in part by limiting the amount that bills can fall for ratepayers who would otherwise see a significant reduction. Under the scheme, limits continue to apply to yearly increases and decreases until the full amount is due.

The Government has issued a consultation on a new transitional relief scheme for implementation of the 2017 revaluation, with two options indicating that option 2 is their preference.

Therefore, in England, unlike Wales, a downward cap will apply to large reductions in rateable values for Steelworks and any large business.

In year 1, Steelworks and large businesses will effectively be limited to a 4.1% downwards cap.

The outlook for construction in England

England’s largest steelworks in Scunthorpe has seen its rateable value plummet from £26.66m to £22.48m, a 16% drop. This year the plant will pay £13,250,020 in business rates but next year, without any downward cap, that would be £10,790,400 say CVS business rates specialists. However, the Government’s downward cap means next year the bill will only fall marginally to £12,889,379.

Across the 10 main steelworks still remaining in England, CVS says rateable values have fallen by 17.57%, and if no downward cap was in place, as in Wales, they too would similarly save a quarter on their rates next year ; equating to 20.39% or £5.35m.

The consequences of the 4.1% downward cap, say CVS, is that steelworks next year will only actually see a drop in real terms of 4.37% in their actual rates payable and only save £1.14m, £4.2m shy of what they would have saved if no transitional relief was applied as in Wales.

Conclusion

The revaluation in England and Wales of steelworks is undoubtedly good news. Rateable values have fallen.

However, given the position of devolution of rates, and a very different position taken by the Welsh Government and Department for Communities & Local Government on how to deal with the volatility, the unintended consequences is to create a far more lucrative property tax incentive in Wales at the expense of their English counterparts.

A business rates specialist says;

“Welsh steelworks will pay a quarter less in business rates next year as a result of the revaluation, saving the sector £3.38m across the 5 main plants.

“Steelworks in England however, have seen rateable values drop by 17.57% on average, but given the effects of transitional relief, their overall bills will only fall by 4.37%, meaning their savings are £4.2m shy of what they should be.

“If they were comparable to their Welsh counterparts their bills overall would fall by 20.39%.

“The stark contrast here is frankly unbelievable for a sector in such crisis.

“The Prime Minister’s new administration is signalling a willingness to think differently on economic policy, so I would urge her to reflect upon the business rates rules which discourage investment in new and modern machinery.”

Compliments of IPTI – a member of the EACCNY