The 35 per cent capital gains tax on the sale of inherited property, introduced in last year's budget, helped to inflate property prices by up to 40 per cent, according to the president of the Notarial College, Victor J. Bisazza.
The sharp rise in prices was also due to a scarcity in immovable property, partly brought about by a decision to withdraw inherited assets from the market in the hope of better times.
"Inheritors who had no choice but to sell their property put up their prices to make up for an increase in taxes," Dr Bisazza said.
The Notarial College had lashed out at the government following last year's budget when the new tax was introduced.
The college had warned of an explosion in property prices, claiming inheritors would not risk putting their property on the market in a scenario where the government was entitled to such a large portion of the cake. "With such high taxes, it is no longer profitable to sell property which has been inherited. Our warnings have materialised and we have been proven right," Dr Bisazza said.
In a pre-budget deal reached between the college and Parliamentary Secretary Tony Abela last year it had been agreed that the existing capital gains tax on property would be replaced with a final withholding tax of seven or 10 per cent on the price.
But in a last-minute U-turn, the government decided not merely to retain the capital gains tax on all property but also to introduce the same tax on sales of inherited property, which had been exempted up till 2003.
What the Notarial College deemed most unfair was the measure imposed on all those who had signed promises of sale (konvenji) before the budget as the new law affected all immovable property inherited and being sold. Instead of exempting all konvenji signed before the budget and making a cut-off date, the government introduced a one-time five per cent tax for konvenji signed before the budget, a measure that created substantial confusion and inconvenience to citizens and notaries, Dr Bisazza said.
Though the Notarial College was in favour of some form of taxation, it deemed a 35 per cent tax to be too high on all sales of property. The average rate of capital gains tax worldwide was in the region of 19 per cent.
"Even where it is 35 per cent or slightly more (as in France), there are fair and reasonable amortisation rates which reduce the gain over a passage of time - nullifying it over 10 years for example."
Dr Bisazza said that in the case of inherited property, however, it was even more unjust to impose high taxation on people who had made sacrifices to invest in immovable property with the hope of passing on their assets to their children.
Besides having to pay a five per cent tax on the value of property on the causa mortis (the declared value of property immediately after death), the heirs have to pay seven per cent on the deed of the whole value of the property, for sales of property inherited pre-1992, and 35 per cent on the profit made (from which the initial provisional seven per cent duty would be deducted) on sales of property inherited after 1992.
Capital gains are calculated on the difference between the value of property on causa mortis deeds signed post 1992 and the price stipulated in the sale.
"After doing their homework, beneficiaries realise they will pocket only a small share of the income when the property is sold and that the government will pocket a share almost as if it were one of them".
Dr Bisazza explained that the situation was even bleaker because there was no proper inflation index for immovable property, with the result that capital gains tax in Malta was one of the highest in Europe and the few instances where certain transfers were exempted - like the three-year residence rule and donations to certain relatives - did not really ease the burden.
Unlike last year, there have been no meetings between the notaries and the government for any changes in the upcoming budget.
"So much for djalogu (dialogue)!" Dr Bisazza said.