Not since the abolition of the maligned
Residential Property tax in 1997 have we had a tax based on the value of the dwellings
of ordinary citizens. However, in economically
strained times the unpalatable becomes acceptable and frees politicians to re-consider
long-abandoned revenue raising measures to make ends meet. And so with Budget
2013 the Minister of Finance announced the re-introduction into the tax code of
the concept of a property tax, which from 1st July 2013 will be
levied on all owners of residential property; homes, second homes and
buy-to-lets, situated within the State.
The news did not come as a
surprise however, the Household Charge and the Non Principal Private Residence
charge having cleared the way. The new tax will replace the Household Charge which
is abolished from 1st January 2013, and the Non Principal Private
Residence charge which is due to come to an end on 1st January 2014. Investors should
note that there is an overlap for a period after 1st July 2013 where
they potentially are liable both to the new Local Property Tax and to NPPR.
The property tax is applied in
accordance with an ingenious system, but basically at a rate of 0.18% of
property valued up to €1M and at 0.25% on property above €1M.
Quite apart from the fact that
the tax seemingly is breaking with a 15 year absence of property tax from the
Irish tax code there a number of aspects of the tax which gives food for thought:
- Significant is the increase in the costs of owning property. In his speech the Minister, somewhat disingenuously declared that the tax when compared to the Household Charge only represented an increase of €57 for a property worth €150k. He forgot to mention however that this comparison would only be valid for the year 2013 where only ½ year of tax will apply. In years to follow, the increase is €114. On a private residence worth €500k the owner has since 2011 paid an annual charge of €100. From July 2013 that figure is increased to €855.
- The tax is based on a percentage of the Gross Asset Value of the property. There are no deductions for the mortgage. For debt ridden Irish homeowners there are no deductions for the portion of the property “owned by the bank”. For many it will be a tax not on wealth but on debt.
- The Local Property Tax is in the main a tax on already taxed monies. The homeowner above who pays marginal income tax and PRSI has to make €1282.50 on average in order to pay property tax of €855 for 2014. With that fact in mind it is difficult to see how the Minister arrived at the conclusion that the property tax is “a better alternative to increased taxes on income” (but he did).
- The local aspects of the Local Property Tax are difficult to discern. After the mixed experience of involving the County Councils in the collection of the Household Charge, the Government is now reverting to centralisation. Yes, according to the Minister, the tax is meant to fund public services, and yes the Minister also made some references to the present administration’s commitment to local government – which pledge was backed up by some token powers granted to local authorities in the area of the rates applied. However, this new tax is prescribed by central not local government, it will all be collected centrally and the revenue from it distributed, also by central government, in much the same way as any other tax.
- Advisors should be tuned into the fact that there will be a separate tax return to complete in the Spring of 2013. The details of this tax return will be disclosed at a later stage.
- Where the NPPR and Household Charge legislation exempted property held in a discretionary trust, there is no such exemption with regards to Local Property Tax. The exemption in the NPPR and Household charge legislation has been used to exempt property held in pension schemes as pension schemes are often set up as discretionary trusts. This exemption, it seems, won’t be available with regards to property tax. Accordingly, investors with Irish residential property in their self-administered pension should contact their advisor or provider with a view to ensuring the tax compliance of their scheme.
- Significant is the increase in the costs of owning property. In his speech the Minister, somewhat disingenuously declared that the tax when compared to the Household Charge only represented an increase of €57 for a property worth €150k. He forgot to mention however that this comparison would only be valid for the year 2013 where only ½ year of tax will apply. In years to follow, the increase is €114. On a private residence worth €500k the owner has since 2011 paid an annual charge of €100. From July 2013 that figure is increased to €855.
- The tax is based on a percentage of the Gross Asset Value of the property. There are no deductions for the mortgage. For debt ridden Irish homeowners there are no deductions for the portion of the property “owned by the bank”. For many it will be a tax not on wealth but on debt.
- The Local Property Tax is in the main a tax on already taxed monies. The homeowner above who pays marginal income tax and PRSI has to make €1282.50 on average in order to pay property tax of €855 for 2014. With that fact in mind it is difficult to see how the Minister arrived at the conclusion that the property tax is “a better alternative to increased taxes on income” (but he did).
- The local aspects of the Local Property Tax are difficult to discern. After the mixed experience of involving the County Councils in the collection of the Household Charge, the Government is now reverting to centralisation. Yes, according to the Minister, the tax is meant to fund public services, and yes the Minister also made some references to the present administration’s commitment to local government – which pledge was backed up by some token powers granted to local authorities in the area of the rates applied. However, this new tax is prescribed by central not local government, it will all be collected centrally and the revenue from it distributed, also by central government, in much the same way as any other tax.
- Advisors should be tuned into the fact that there will be a separate tax return to complete in the Spring of 2013. The details of this tax return will be disclosed at a later stage.
- Where the NPPR and Household Charge legislation exempted property held in a discretionary trust, there is no such exemption with regards to Local Property Tax. The exemption in the NPPR and Household charge legislation has been used to exempt property held in pension schemes as pension schemes are often set up as discretionary trusts. This exemption, it seems, won’t be available with regards to property tax. Accordingly, investors with Irish residential property in their self-administered pension should contact their advisor or provider with a view to ensuring the tax compliance of their scheme.
Tommy Nielsen
Legal Officer
ITC Consulting
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