Even though Leader of Government Business McKeeva Bush said Thursday his government would not take the suggestion of UK Parliamentary Under-Secretary of State Chris Bryant and institute a property tax, Cayman’s realtors were up in arms over the mere suggestion.
In a statement released to the Compass Wednesday evening, the Cayman Islands Real Estate Brokers Association voiced its concerns over such a possibility.
‘CIREBA is fully supportive of the idea of balancing the budget over the long term,’ the statement said. ‘We recognize that achieving this going forward will require careful planning and serious thought.
‘We also recognize that consistent with this principle, government must in the upcoming good years, set aside meaningful reserves by way of deposits or debt reduction to serve the country in slow times which are sure to come again.’
‘The suggestion that the introduction of property tax would assist in balancing the budget is a well intentioned one that will have a decidedly negative effect on government revenue.’
The statement argues the Cayman real estate market is unlike the US, the UK and Swiss markets.
‘There are two distinct and very important elements that make our market unique, one, the percentage of property on the market at any time and two, the proportion held in foreign hands. These two components in our market are significant. CIREBA believes that trying to compare the Cayman Islands to these dissimilar markets would be a grave mistake and will result in the wrong conclusions,’ it says.
The statement refers to the current stamp duty revenue measure, which has been reported by government to be just under CI$40 million per year.
‘The reported amount totals approximately eight percent of government revenue. For sake of comparison, during those same years, government revenue from bank and trust company licenses has ranged from CI$24 million to CI$25 million the statement says.
CIREBA pointed out the reported amount of annual revenue from stamp duty on property transfers is one of the highest revenues received by government, exceeded by any meaningful amount only by import duties.
‘CIREBA believes that the introduction of the proposed property tax will have a negative effect on the Cayman Islands as whole, and would negatively impact future property transactions from both local buyers and overseas investors,’ it stated.
‘Collection of stamp duty is easily administered and is a far more cost effective system than the property tax system that has been recently proposed, whereas the Government would have to initially value and then periodically re-value every property in the Cayman Islands to asses a value driven property tax. CIREBA believes the set up and cost of such a system will take years and will cost millions to administer on an ongoing basis.’
The other concern raised by CIREBA was that given the current global market adding the additional expense of a property tax will make it even harder to sell investment property in Cayman.
‘For the local would-be homeowner, it will serve to increase the monthly cost of owning a home and thus reduce the amount of the mortgage for which a purchaser will qualify,’ said Association President Kel Thompson.
‘In other words, sales will decrease and stamp duty revenue with it. What will in theory be gained in property tax will be lost in stamp duty before factoring in the costs of the new bureaucracy that will be required to administrate a property tax. Without doubt, the costs of administration of a property tax register and collection system will wipe out a good portion of the amount collected,’ he continued.
‘The effect of the proposed property tax and many of the other initiatives raised as a result of the country’s current financial position and the dictates of the United Kingdom create significant threats to our economy, our envied affluence and our way of life in the future. While CIREBA is supportive of the system whereby UK oversight encourages responsible fiscal policy, we clearly recognize and warn that the well-intended specific suggestions and demands of the UK Foreign Office, which is what has given rise to this issue, are not necessarily in the best interest of Cayman and will not serve to preserve our affluence and our way of life.’
At least one vocal member of the Cayman financial community, former Cayman Islands Monetary Authority Chairman Tim Ridley has noted that at some point, a property tax might make sense.
The total market value of all real estate in the three Islands is estimated to be between US$12 and US$18 billion, which is based on the worth of the total listed properties. Historically, 10-15% of all property is listed for sale.
He says a one-quarter of one per cent charge would produce annual revenue of between US$25million and US$45 million. He argues this would be much more consistent and reliable than one-off stamp duty that is so dependent on a buoyant market.
‘There could be appropriate exemptions for low value properties and those in real need and genuinely unable – rather than unwilling – to pay,’ he said.
He said as an incentive to the acceptance of the new charge, a further reduction in stamp duty of sales and purchases might be considered, saying the short term loss of revenue would be more than recovered over time by the new charge.
As example of the new charge, Mr. Ridley said a house worth US$500K would carry an annual charge of US$1,250.; a US$3 million house would carry an annual charge of US$7,500.
‘The buyer today gets a big plus under my scenario,’ he said. ‘It would be preferable for a buyer to pay $7,500 per annum rather than US$75,000 upfront at the time of purchase,’ he said.
‘If he holds for less than 10 years, he is ahead. If he holds longer, does he really object to a modest fee that would go toward services? It is peanuts compared with such expenses as monthly strata fees and insurance.’
However, it seems that for now, the Cayman Islands realtors can relax.
G. Robert Totten of Cayman Luxury Property Group noted that at least two potential buyers had expressed concern about the potential for a property tax.
‘Just the thought of a tax is enough to make people think twice,’ he said.
CIREBA has prepared and posted on its website a more detailed report on the effect that a property tax will have on our local economy and government’s revenue.