Government officials are going after millions of dollars in unpaid taxes on rental properties.
The Lands and Survey Department has issued a reminder that every tenant in the Cayman Islands should be paying stamp duty, regardless of the length or type of their lease.
Several real estate agents told the Cayman Compass they were unaware of the requirement.
The Cayman Islands Real Estate Brokers Association says traditionally the law has not been enforced on residential leases.
“I have never heard of anyone that has paid it,” said Jeanette Totten, the association’s president.
They should be, said Jon Hall, chief valuation officer with the Lands and Survey Department. He acknowledged that collection of the tax on residential rental properties has historically been lax, but he said the law clearly states that 5 percent of the annual rental value on any lease agreement, regardless of length or type of lease, is due in stamp duty taxes to the government.
“I can understand how some confusion and misunderstandings may have arisen,” he said.
“However, there are no exceptions, and I cannot stress enough – if you have a written lease, regardless of whether it is called a tenancy, lease, agreement or other similar description, then stamp duty is payable on it.”
Based on realtors’ estimated average rental value of $1,600 per month across all rental properties in the Cayman Islands – 9,678 according to the 2014 Compendium of Statistics – government could be collecting more than $9 million on residential leases annually if it were able to ensure universal compliance at current tax rates.
Mr. Hall accepts that enforcement is difficult and that, to an extent, the department relies on the good faith of landlords and their tenants to obey the law, now that it has been publicly clarified. He warned, however, that those who do not comply potentially face fines. Precisely who pays should be defined in the terms of any lease agreement, although it is acknowledged that tenants will ultimately bear the burden through higher rents, even if they are not held directly responsible for the tax.
An earlier internal analysis of residential stamp duty collection by the Department of Lands and Survey suggested simplifying and reducing the tax requirements for residential leases in the hope that tenants could be convinced to pay the lower rate. In the 2009 proposal, which has not yet been taken up, department surveyor Iain Franklin suggested that government is missing out on a revenue stream that, even at substantially reduced rates, could be worth more than $1 million a year.
He stated that there are differing views within the department on whether any type of stamp duty is appropriate for residential leases, noting, “it has never been collected in good times and bad, which suggests it never will in its current form.”
Lands and Survey research at the time suggested there were around 8,000 rental properties in the Cayman Islands. Mr. Franklin’s suggestion was to replace the 5 percent duty with a fixed-rate system based on bands. Under his proposal, properties rented at less than $1,200 a month would pay a duty fee of $100, while properties in the highest band of $10,000 or more per month, would pay a $2,000 duty fee.
“Even if the majority of leases fell in the lowest threshold this is likely to yield in excess of CI$1 million per year in additional revenue,” he wrote.
Mr. Franklin suggested that charging less and collecting the duty was a more viable option than attempting to enforce the higher rate.
“From a public standpoint, this change legally reduces the duty on a vast majority of residential leases from 5 percent to no more than 1.5 percent. The change from an effective rate of zero percent, through lack of collection, is unlikely to attract public criticism, as doing so would in effect be advocating stamp duty evasion,” he wrote.
Since that memo in 2009, the issue has lingered without resolution.
Mr. Hall said the department is still committed to reviewing policy on stamp duty on residential leases with a view to establishing a simpler, more easily enforceable system. In the interim, he says, those who are not paying the tax are breaking the law.
“The law has always been that stamp duty is due on all leases, full stop. There is a lot of unpaid money that we need to address.”
He said it is difficult to predict how much unpaid tax is due the government annually, and said that very few landlords and tenants currently pay the duty.
The Cayman Islands Real Estate Brokers Association has called for government to take another look at the requirement.
Ms. Totten, the association’s president, said, “Our main concern is with the tenants and how they will be able to afford to engage in a new lease.”
Based on a sample apartment rental at $2,000 a month on a one-year-lease, she calculates a tenant would have to come up with $5,200 to move in, taking into account the first month’s rent, security deposit and a stamp duty charge of $1,200 (5 percent of the $24,000 annual rental value).
“The young Caymanian or even those who are on a work permit in, for instance, the service industries will find it difficult if not impossible to come up with such a large deposit,” she said. “Some might say, well make the landlord pay it. Let’s be realistic; it will just be reflected in the rent with all rents increasing by 5 percent.”
Stamp duty on commercial leases is collected without the same issue because the leases are typically registered and need to be stamped as a registration requirement.
Kim Lund of real estate company RE/MAX said registering commercial leases offers both parties protection in cases where the property is sold. A shop owner with a registered five-year lease, for example, cannot be evicted from a plaza after a change of owner. This protection means the vast majority of commercial leases are registered and stamp duty is paid, he said.
Registration is required for leases of longer than two years and optional below that threshold. Duty is payable, though harder to enforce, on unregistered leases.
More information on stamp duty is available at www.caymanlandinfo.ky.