Fiscal consideration in buying or selling an immovable property

Malta is experiencing a high demand for vacant property and as a result, property prices are skyrocketing. Whether one is planning to buy or sell property, it is recommended that the individual is indeed informed about one particular area which everyone is “fond” of: Tax.

In the 2014 budget, we saw major changes with respect to new tax rates as well as exemptions on sale of property. 1 January 2015 saw the commencement of these changes.

The current tax rate on sale of property is a final withholding tax of 8% on the transfer value. Residential property which is sold by an individual within three years of acquisition is taxable at the rate of 2% final withholding tax if the individual does not own any other residential property at transfer date. Property held as a sole or main residence is exempt from tax as long as the property had been owned for at least three consecutive years immediately before the date of property transfer. Eligibility for this tax exemption saw that the law allows a maximum of 12 months for an individual to vacate and sell the old property even if a new residence is purchased before the old residence is sold. In the local income tax law, residences also include a garage of not more than 70 square metres situated no further than 500 metres from the same residence and sold together with the residence as one contract of sale.

If the property is transferred within five years of acquisition, then the tax rate is of 5% if the seller is not a property trader and the property is not part of a project complex. The sale of property situated in Valletta is charged a final withholding tax of 5% if the property was acquired before 31 December 2018, renovated and sold by not later than 31 December 2023.

Schemes and exemptions

The Malta Environment and Planning Authority (Mepa) introduced a new scheme with respect to transfer of property, grade 1 or 2, which had been restored and are situated in an urban conservation area. For transfer of such property after 1 January 2015, tax shall be chargeable at 7% final withholding on the transfer value. A 10% tax charge is incurred on the transfer value if a notice of promise of sale has been made to the Commissioner by 17 November 2014.

The reform from 1 January 2015 also brought along exemptions. One such exemption from tax liability includes the transfer of property to the Government of Malta in terms of the Land Acquisition Ordinance as part of a Public Purpose agreement. Other exemptions include the transfer of property between group companies, sale by court order in case of winding up or judicial auction and transfer between spouses upon separation, divorce or property received by heir of a deceased spouse. In adjacent, the transfer of property by a company to its shareholders in the course of winding up through a scheme of distribution is also exempt from tax.

Furthermore, an exemption is also allowed on property which had been held by a business for more than three years and is subsequently replaced by another property within 12 months for the business’ similar operational activities.

No tax shall be payable if an immovable property is given as a donation to the spouse, descendants and ascendants in the direct line. In the absence of descendants, the exemption is allowed if the property is transferred to his brothers or sisters and their descendants or donations to philanthropic institutions approved by the Commissioner of Revenue. On the other hand, as a tax abuse provision, if the property is transferred again or disposed of by the individual or entity receiving the immovable property within five years, the person who had received the donation shall be charged 12% tax on the excess if any, of the transfer value over its acquisition value.

Barters

For tax purposes, any transfer of immovable property by means of a deed of exchange shall be considered as if separate deeds of transfer were taking place between the parties of the deed. A deed of exchange is when two properties are exchanged. In simpler words, for tax purposes these are considered as the sale of two properties and the amounts cannot be netted off against each other but a final withholding tax shall be paid on each property sold.

Inheritance

Tax on transfer of property from inheritance referred to as Causa Mortis is charged at 12% final withholding tax on the gain made on the sale deducting the property value declared in the Causa Mortis document for property inherited after 24 November 1992. In the case of property inherited before 25 November 1992, the rate of tax is of 7% final withholding tax on the transfer price. During the 2017 budget, the 7% final withholding tax has been extended to both transfers of property acquired Causa Mortis pre-1992 and also post-1992 in case of property which is sold by judicial auction.

Stamp duty on transfer of property in Malta

Duty in Malta is paid by the buyer of the property charged at a rate of 5% on the higher of the immovable property value or purchase price. One should be aware that no death tax or duty is payable in Malta. On the other hand, duty on documents and transfer costs are to be paid by the heirs of the deceased.

The first time buyer’s scheme has also been extended during the 2017 budget allowing individuals who will be purchasing their first residential property to be exempt from stamp duty on the first €150,000 of the property transfer price.

A new exemption has been implemented during the 2017 budget with respect to duty on transfer of immovable property used for family businesses. If a commercial property has been used by a family business for at least three years prior to a transfer of such property to a close family relative, duty will be charged at a reduced rate. In the case of individuals applying this reduced duty, they will not be eligible to claim any other exemptions or relief from duty. The reduced rate applies for transfer of property on or after 1 April 2017 but prior to 1 April 2018, but if the relative receiving the property transfers such property again within three years, the exemption is forfeited and the 5% basic rate should be paid in total. Lastly, the said property shall be used again for commercial purposes for at least three years subsequent to the transfer between family members for the exemption to apply.

The reduced stamp duty rate for eligible family businesses amounts to €1.50 on every €100 value of the commercial property transferred between eligible family members.

Another initiative resulting from the 2017 budget reduces the stamp duty from 5% to 2% on residential property purchased in Gozo. The eligible criteria’s include that the promise of sale had to be registered by the Inland Revenue Department by 31 December 2017 and most importantly, the contract shall be concluded by end of 2018 for the reduction to be eligible. Shanice Finch is a consultant with Erremme Business Advisors Limited