This week my intention is to take a closer look at the various taxes imposed on the property market. Since 1992 the property market has been continuously burdened with new taxes. Even worse, fiscal systems have changed and been constantly amended. All this has left a significant impact on the price of property.
The tax measures involved are primarily these: Transfer Tax, Capital Gains Tax, Final Withholding Tax, VAT and the Tax on the sale of Inherited properties. All the above are always payable except for certain exemptions applicable.
The first fiscal measure we will look into is Transfer Tax (commonly referred to a as Stamp Duty, since in days gone by postage stamps were affixed to a contract as proof of payment). This is a tax which is imposed on every transaction and is payable by the purchaser. The only exemption applicable relates to inter company transactions, and this under stringent conditions. However, there are certain deductions applicable to people acquiring their sole primary residence, being:
i. 3.5% on the first € 116,500 and 5% thereafter.
Example:
Purchase price € 128,115
€ 116,500 @ 3.5 % = € 4077.50
€ 11647 @ 5% = € 582
Total: € 4659.5
In all other cases, the tax payable is 5% of the total purchase price.
Example:
Purchase price € 140,000
€ 140,000 @ 5 % = € 7000
Total: € 7000.
Capital Gains Tax introduced in 1992 and amended in 2005, is a tax always bourne by the seller. People who have owned and resided in their sole primary residence for a period exceeding 3 years are exempt from paying this tax. In all other cases, the following applies:
Properties inherited prior to the 25th of November 1992 pay a final withholding tax of 7% on the selling price.
Properties inherited after 24th of November 1992 are liable to a 12% tax on the difference in value between the value declared on Causa Mortis (deceased estate declaration) and the selling price.
Second properties and anyone selling their sole primary residence prior to the 3 year period, can either opt for the capital gains system or pay a final withholding tax of 12%, the option being only applicable for the first five years of ownership, after which the final withholding tax applies.
The capital gains tax system works in the following manner: On contract the vendor will be charged a 7% provisional tax, then one would have to produce a tax computation in their income tax return of the following year, indicating: the original purchase price, less any structural and amelioration expenses incurred in the property (receipts would be required, if after 1995 these have to be fiscal receipts) stamp duty and notarial fees paid, etc.,
The results of the above should be deducted from the selling price leaving the profit. This profit has to be declared as income in the following year’s return and taxed at the appropriate rate, less the amount of provisional tax already paid on contract.
Example:
Selling Price € 186,350
7% Provisional tax paid on contract = € 13,044
A- List of expenses
Purchase Price € 116,500
Works from Shell to finish € 18,635
Stamp duty € 9317
Notarial fees € 2329
Total: €146,781
Selling price: € 186,350
Total expenses A € 146,781
€ 39,569 profit x 35% tax = € 13,849 less 7% provisional tax already paid € 13,044 = Balance of tax due = €805.
The above is only a very simple explanation of how the system operates and professional advice should be sought.
The last tax that has a weighing on property value is VAT. Now the reader must be wondering, how VAT could possibly be a burden, if it is reclaimable? The answer is that VAT cannot be reclaimed by developers, so that the 18% VAT payable on any construction material or service becomes a cost and is therefore reflected in the final property price.
Now that we have looked at the various taxes involved let us take a quick look at the effect they have on the property market. Developer X decides to purchase a plot of land for € 200,000 from a family who inherited the property in 1990, what is the government’s share on transfer: € 10,000 from the developer and €14,000 from the sellers, for the grand total of € 24,000 or 12% of the value of the transaction.
The developer constructs the plot and spends € 150,000 in masonry works and finishes, thus paying 18% VAT, equivalent to € 27,000, which as stated earlier are not reclaimable and therefore added as a cost. So far our tax bill is € 51,000, equivalent to 14.57% of the investment.
Investors place their properties on the market for sale on the 5th year, due to the delays inherent in obtaining planning permission etc., meaning that he has no other option but to incur the 12% withholding tax. Let us say that the market value of the project is € 500,000 for argument’s sake. This will equate to € 60,000 in final withholding tax, which will further equate to a total tax liability of € 111,000 or 22.2% of the project value.
Any further comments on the above are superfluous as the figures speak for themselves.
Trafford Busuttil
Chairman of the Real Estate Trade Section – Malta Chamber of Commerce
President of the Federation of Estate Agents
Managing Director of Propertyline International
The tax measures involved are primarily these: Transfer Tax, Capital Gains Tax, Final Withholding Tax, VAT and the Tax on the sale of Inherited properties. All the above are always payable except for certain exemptions applicable.
The first fiscal measure we will look into is Transfer Tax (commonly referred to a as Stamp Duty, since in days gone by postage stamps were affixed to a contract as proof of payment). This is a tax which is imposed on every transaction and is payable by the purchaser. The only exemption applicable relates to inter company transactions, and this under stringent conditions. However, there are certain deductions applicable to people acquiring their sole primary residence, being:
i. 3.5% on the first € 116,500 and 5% thereafter.
Example:
Purchase price € 128,115
€ 116,500 @ 3.5 % = € 4077.50
€ 11647 @ 5% = € 582
Total: € 4659.5
In all other cases, the tax payable is 5% of the total purchase price.
Example:
Purchase price € 140,000
€ 140,000 @ 5 % = € 7000
Total: € 7000.
Capital Gains Tax introduced in 1992 and amended in 2005, is a tax always bourne by the seller. People who have owned and resided in their sole primary residence for a period exceeding 3 years are exempt from paying this tax. In all other cases, the following applies:
Properties inherited prior to the 25th of November 1992 pay a final withholding tax of 7% on the selling price.
Properties inherited after 24th of November 1992 are liable to a 12% tax on the difference in value between the value declared on Causa Mortis (deceased estate declaration) and the selling price.
Second properties and anyone selling their sole primary residence prior to the 3 year period, can either opt for the capital gains system or pay a final withholding tax of 12%, the option being only applicable for the first five years of ownership, after which the final withholding tax applies.
The capital gains tax system works in the following manner: On contract the vendor will be charged a 7% provisional tax, then one would have to produce a tax computation in their income tax return of the following year, indicating: the original purchase price, less any structural and amelioration expenses incurred in the property (receipts would be required, if after 1995 these have to be fiscal receipts) stamp duty and notarial fees paid, etc.,
The results of the above should be deducted from the selling price leaving the profit. This profit has to be declared as income in the following year’s return and taxed at the appropriate rate, less the amount of provisional tax already paid on contract.
Example:
Selling Price € 186,350
7% Provisional tax paid on contract = € 13,044
A- List of expenses
Purchase Price € 116,500
Works from Shell to finish € 18,635
Stamp duty € 9317
Notarial fees € 2329
Total: €146,781
Selling price: € 186,350
Total expenses A € 146,781
€ 39,569 profit x 35% tax = € 13,849 less 7% provisional tax already paid € 13,044 = Balance of tax due = €805.
The above is only a very simple explanation of how the system operates and professional advice should be sought.
The last tax that has a weighing on property value is VAT. Now the reader must be wondering, how VAT could possibly be a burden, if it is reclaimable? The answer is that VAT cannot be reclaimed by developers, so that the 18% VAT payable on any construction material or service becomes a cost and is therefore reflected in the final property price.
Now that we have looked at the various taxes involved let us take a quick look at the effect they have on the property market. Developer X decides to purchase a plot of land for € 200,000 from a family who inherited the property in 1990, what is the government’s share on transfer: € 10,000 from the developer and €14,000 from the sellers, for the grand total of € 24,000 or 12% of the value of the transaction.
The developer constructs the plot and spends € 150,000 in masonry works and finishes, thus paying 18% VAT, equivalent to € 27,000, which as stated earlier are not reclaimable and therefore added as a cost. So far our tax bill is € 51,000, equivalent to 14.57% of the investment.
Investors place their properties on the market for sale on the 5th year, due to the delays inherent in obtaining planning permission etc., meaning that he has no other option but to incur the 12% withholding tax. Let us say that the market value of the project is € 500,000 for argument’s sake. This will equate to € 60,000 in final withholding tax, which will further equate to a total tax liability of € 111,000 or 22.2% of the project value.
Any further comments on the above are superfluous as the figures speak for themselves.
Trafford Busuttil
Chairman of the Real Estate Trade Section – Malta Chamber of Commerce
President of the Federation of Estate Agents
Managing Director of Propertyline International
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