Get the taxation of property right and you significantly increase a country’s overall tax intake. Systems will need to evolve to fit today’s economic trends and behaviors.
- The ratio of property taxes to GDP varies widely globally, with the OECD average at 2 percent.
- Transactional taxes such as stamp duty focus on the owner and tax the value on transfer — but can distort behavior.
- Annual property taxes tend to focus on the benefits of occupying premises but require regular valuations to effectively capture increases in value.
What is land tax?
What would be the key characteristics of a perfect land tax? Throughout history, governments have sought to increase revenues by taxing land. Historically, land tax has been especially well-employed when the taxation of effort, such as income, was deemed unpopular or difficult to collect. In the 18th century, window tax was introduced in France and the UK as a revenue raiser for central government. Although eventually becoming unpopular, window tax started off as relatively uncontroversial. It was considered to be progressive in relation to wealth (bigger houses have more windows), and it was easy to calculate by simply counting the windows.
In today’s global tax environment, tax systems still strive for similar characteristics, with the holy grail a tax system that is progressive, easy to quantify and collect, while also driving the right sort of economic behavior and ensuring also that the burden falls on the right person or group of people.
At 4 percent, France and UK have the highest proportion of property tax as a percentage of GDP across the OECD countries — still not a significant percentage. Germany, Sweden, Chile and Austria are all less than 1 percent, lower than the OECD average of just over 2 percent. Interestingly, as a percentage of overall tax take, the UK is again at the top of the OECD countries with over 12 percent of its tax take from property taxes (which would be predominantly Stamp Taxes). Korea is also at 12 percent and the US at 10 percent, showing that getting the taxation of property right can significantly increase the overall tax take for a particular country.
Property taxes fall broadly into two categories — recurrent annual taxes and transactional taxes. Most countries levy both type of taxes but the burden often falls in different ways, with the annual taxes typically placed on the occupier and the transactional on the owner. Of course these are sometimes the same, but it is interesting that where property tax is levied to fund consumption of local services, it tends to fall on the occupier. Correspondingly, setting the rate is devolved to local government whereas transactional taxes typically fall on the owner and are set centrally, although there are some cases where these taxes are set locally, in the city of Toronto, for example.
Transactional taxes are simpler to administer and collect as there is usually a connection to an agreement between parties where a value (typically the market value) is agreed upon, paperwork is submitted and — usually at least — cash changes hands. Due to their distortionary nature, transaction taxes can, however, prevent the right sort of economic behavior, such as people moving for work or trading up or down in relation to their circumstances. In isolation, transactional taxes are not the perfect property tax.
Most OECD countries have some form of transactional tax on the transfer of legal title, known as stamp taxes in Australia and the UK and as (land) transfer taxes in Canada, Spain, Italy, Germany, Japan, France and the US. The taxes are typically applied to the market value but the rates vary widely from 0.5 percent to 18 percent. Owners are usually also subject to domestic tax applied to gains on disposal of property even when the owners themselves are not resident in the country (again, usually levied by central government not local government). The UK is one of the last countries to be consulting on increasing the scope of UK capital gains to include gains made by non-UK resident individuals on commercial property — having extended the scope for residential property since April 2015. Transactional taxes can have significant impact on economic behavior, so there is a trend away from slab rates on transactional taxes (where the rates increase on the entire amount once you exceed a threshold) to ascending marginal rates — a progressive policy as more expensive transactions typically pay more. Transactional taxes therefore capture activity in a market but do not capture the benefit of holding on to property or the benefit of significant government expenditure that improves the local environment.
Wealth and annual property taxes
Wealth taxes on property, found in a number of countries globally (Spain, France, Italy and Portugal to name a few), do seek to tax the long-term benefit of holding property, although with many exemptions, and usually fairly low rates applied to historic or net asset valuations. Such wealth taxes do not seem to meet the modern criteria for property tax: they tax the owner rather than the occupier (who may not be the same person); due to the historic nature of the valuations used, the revenues do not grow with the economy, and they are usually fairly complex with lots of exemptions and reliefs.
Other annual property taxes do capture the benefit of occupying a property where they fall onto the occupier — such as business tax or local government tax — and typically they contribute to funding local services that are consumed. Globally there are challenges on how these taxes are calculated: Are they based on market values or annual rental values? How easy are they to collect? The criticism of annual property taxes is that, while they are designed to be progressive, the burden does sometimes fall disproportionately on the asset-rich/cash-poor population such as pensioners who have lived in the property a long time, or on low earners who live in an area where values have increased significantly due to external investment.
The key for keeping property taxes relevant is to base them on up-to-date valuations. Belgium and Germany require property valuations to be updated by legislation, which means that it does not happen often and, when it does, it can give rise to dramatic shifts. Portugal, Turkey and the UK only have periodic revaluations too. Denmark meanwhile has biannual updates, and France and South Korea also update valuations every year. The benefit of more frequent valuations is that, not only does the tax take increase in line with the economy, it also captures increases in value that are not funded by the owner. This could be, for example, significant government expenditure in an area’s infrastructure. Care needs to be taken to ensure that this does not act as a disincentive for landowners to improve their assets, especially where it generates local wealth. Therefore, an annual taxes regime would need to include specific exemptions for the right type of improvements and encourage the right type of behavior where possible.
The evolving future of property tax
Property will continue to be a key asset for governments to tax and is an area of complexity across the globe. If the key criteria for a property tax is that it is easy to administer and collect, drives the right sort of economic behavior, is progressive, and captures growth in the economy, then we will require a system that continues to combine transactional and annual taxes. The key issue is the rate at which it is set, and how often property values are updated. For today, this model fits. But what about the future? Given the shift toward occupation rather than ownership as today’s younger generation across the globe have a different attitude toward ‘using things’ rather than ‘owning things’, as well as the changing nature of work and shopping online, property tax will continue to evolve as behaviors evolve.
Download the full 'What to tax?' publication here.
Jo Bateson is a Partner at KPMG in the UK and leads the London Private Client Advisory team. Jo has over 18 years’ experience advising high net wealth individuals, trustees and family offices with global tax issues. Jo became a partner of the UK firm in 2014 and is a member of the Association of Tax Technicians, the Chartered Institute of Taxation...