Introduction to Real Estate Taxation in the UK

Introduction to Real Estate Taxation in the UK, US and Canada Date: July 12, 2023 Performed by: Dr Bernard Schneider, Senior Lecturer and Academic Director, Institute of Tax Law UK Legal and Constitutional Context - UK is a quasi-unitary state  Four nations have no inherent taxing powers; some fiscal federalism has been achieved by devolution and by Council Tax mechanism -  Capital Gains Tax and Inheritance Tax are uniform across the UK  Stamp Duty Land Tax and Council Tax vary Property rights are complicated but determinable UK Taxation of Residential Property - - General tax regimes that apply to property  Capital Gains Tax  Inheritance Tax Property-specific regimes  Stamp Duty Land Tax  Council Tax UK Political and Socio-Economic Context - Residential property market is large, transparent and well-regulated  Estimated value is in excess of £8.2 trillion, of which approximately £1.6 trillion is covered by mortgage debt - Residential property is a major source of wealth for individuals  About two-thirds of households own their own home  Accounts for about 36% of household wealth, but more for the middle class  Property values have risen steeply over last 15-20 years  - Low Inheritance Tax threshold means that it affects most of the middle class UK is in serious need of funds  Debt to GDP ratio: 100.1% (end of May 2023)  Tax to GDP ratio: 40%  Tax revenues attributable to residential property 1. Council Tax raises about £44 billion per year for local authorities, but this only represents one-quarter of local government needs 2. A substantial portion of Capital Gains Tax and Inheritance Tax US Legal and Constitutional Context - US is a true federal state  States have independent power to tax, and property law is within the power of the states - Property rights are generally clear and determinable US Taxation of Residential Property - General tax regimes that apply to property at federal and state levels  Income Tax (may benefit from lower capital gains rate) at federal and state levels; special rules may apply to primary residence  - Estate Tax and Estate Tax and/or Inheritance Tax at state level (not all states) Property Tax  Authorized by state but levied by local governments and authorities; states generally set parameters limiting discretion in this area  Varies widely by state and within states  Average rates range from 0.3% to 2.21% of total home value Assessment of value varies - About two-thirds of states also impose real estate transfer taxes US Political and Socio-Economic Context - Residential property market is large, transparent and well-regulated  Estimated value is in excess of US$43 trillion, of which approximately US$15 trillion is covered by mortgage debt - Residential property is a major source of wealth for individuals  About two-thirds of households own their own home  Accounts for about 28% of household wealth, but more for the middle-class Property values have risen steeply over last 15-20 years - Local governments and authorities depend on property taxes  US$580 billion in property taxes collected by local governments (2020), about 70% of their own revenues (ranging from almost 50% to almost 100%)  Public education in particular is financed by property taxes  Quality of services and schools varies widely by location, in part because of the virtuous cycle of property taxes and property values Canadian Legal and Constitutional Context - Canada is a true federal state  Provinces have independent power to tax, and property law is within the power of the provinces - Property rights are generally clear and determinable Canadian Taxation of Residential Property - General tax regimes that apply to property at federal and provincial levels  Income Tax (may benefit from lower capital gains rate) at federal and provincial levels; special rules may apply to primary residence  No estate or inheritance taxes; instead, capital gains is assessed on a deemed disposition at death - Property Tax  Authorized by province for the benefit of municipal governments; provinces set uniform assessment systems, but rates vary from 0.25% to 2.0% - All but two provinces also impose land transfer taxes Canadian Political and Socio-Economic Context - Residential property market is large, transparent and well-regulated  Estimated value is in excess of C$6 trillion, of which approximately C$2 trillion is covered by mortgage debt  - Residential property is a major source of wealth for individuals About two-thirds of households own their own home  Accounts for about half of household wealth, but more for the middle class  Property values have risen steeply over last 20 years