Simplifying the new property tax

The new 12 per cent withholding property tax and the five-year window have had an affect on the way property is sold on the market. The most important thing is to weigh your choices well, says Geoffrey Ciantar, HR and administration manager at Dhalia Real Estate.

Up until November last year, if you wished to sell a property for business, or if the property was not your primary residence, you would have had to initially pay 7% provisional tax upon signing the final deed.

At the end of the year, together with your income tax return, you'd then need to calculate your income, add the profit you would have made on that particular property transaction, then deduct the 7% provisional tax paid.

So, if your income that year was Lm8,000 and you made Lm5,000 on a property, you just needed to deduct the 7% provisional tax you would have already paid on selling the property from Lm13,000 and pay tax on the remaining amount.

For the first five years since purchasing a property until the final deed, you now have a choice - either to go for the old tax regime, which is the 7% provisional tax, which can go up to a maximum of 35%, payable at the end of the year, or the new 12% withholding tax, which is extremely simple because the amount which is to be paid is calculated on the selling price.

Basically, you know, even before signing your final deed, how much tax you will pay, whereas with the 7% provisional-35% tax, it's only when you're filling your income tax return that you know exactly how much tax you're paying.

With the new 12% withholding tax, you know that if you're selling a property for Lm100,000, you owe the government Lm12,000, while if you sell a property for Lm200,000, you then owe the government Lm24,000. So far, simple.

What a lot of people don't know is that if a developer who has just finished a project of a block of 10 apartments opts for a specific tax choice for the first apartment sold, then he must pay the same tax rate when selling his other nine apartments irrespective of whether within the first five years or not.

This might put a lot of pressure on developers since the profit margins can nowadays be pretty low. Building expenses have soared, developers strive to keep prices as competitive as possible and bank interests still need to be paid. Not finishing a development within the five-year window could result in huge losses.

So, a seller, a developer in this case, can only make the choice once. This can hugely affect a business transaction because it all depends on how much profits the developer is making on his investment.

There are a lot of calculations to be made and decisions need to be weighed carefully. Unless one unit is sold from a development, after the five years expire, the seller/developer is left with no choice but to be taxed at 12% withholding tax when selling his property. The same applies to foreign investors.

Non-Maltese buyers can purchase more than one property in designated areas in Malta: Tignè Point, Portomaso, Fort Chambray, Cottonera Project and Tas-Sellum. Only after having lived in Malta permanently for over five years, will EU citizens, have the same rights as the Maltese and can therefore buy property wherever they like.

But if a foreign investor buys four apartments at Portomaso and sells his first apartment at a specific tax rate, if he decides to sell his second apartment years later, he still needs to go for his first choice of tax.

In the case of inherited property, if the immovable is selling at the same price as that declared in the causa mortis (an after-death declaration of inherited property) no tax is paid. If a profit is declared, say on an inherited property declared at Lm100,000 and sold at Lm110,000 (thus making a Lm10,000 profit), 12% tax is paid on Lm10,000. Up till last year, depending on one's income, tax could go up to 35%.

For inherited property before November 25, 1992, there is a 7% final withholding tax on the selling price to be paid. Any property inherited after this date falls under the 12% withholding tax regime, paid on the difference between the price declared on the causa mortis and the actual selling price.

This should curb the under-declaration culture in Malta. There are people who, in order to save money on the 5% stamp duty when inheriting property, under-declare heavily not realising that they will pay much more when they come to sell the property.

An example would be inheriting a property worth Lm50,000 and declaring it at Lm20,000, thus paying the 5% stamp duty on Lm20,000 and not on Lm50,000. When selling this inherited property these people would have to pay 12% tax on a higher amount, due to the fact that the difference between the declared value of the inherited property and the selling price is bigger.

On a final positive note, property donations to family members are now tax-free. Also the sale of shares in the case of co-owned properties, say, in cases of separations, are also not taxed. This will bring some relief in already difficult, emotionally sensitive cases.

I urge everyone to consider the options well before selling a property, and also seek professional advice before making a final decision and signing an agreement.