Thursday, May 5, 2011

Shaw Makes Another Attempt

Our finance minister Audley Shaw is at it again lowering duties and taxes payable in relation to real estate transactions. Will the market respond this time?  For to be sure, despite repeated reductions in stamp duties and transfer tax the real estate and construction markets remain sluggish.

Mortgages

Mr. Shaw has focused on reducing duties payable on the re-financing and transfer of mortgages to a nominal fee of J$100 effective 16 May, 2011. This however will apply only if the loans are NOT being increased in which case the regular duties will apply.

Will this really stimulate the market? Hopefully the banks will be stirred by this incentive into lowering interest rates and so borrowing will increase but where are the buyers going to find the  income and/or savings from which to pay a deposit or make monthly mortgage payments? 

In order to stimulate growth the government is obliged to find ways to encourage spending yes, but the potential buyers cannot spend what they don't earn. The focus must be on job-creation.



Transfer Tax on Death

Section 5(1) of the Transfer Tax Act states that:
on the death of any individual after 31st May 1974, all property of which he was at his death competent to dispose shall, for the purpose of taxation in conformity with Subsections (2) & Section (3) of Section 12, be deemed to be, for a consideration equal to the market value at the date of his death to the persons to whom such property passes on 

Despite the fact that there are exempt categories, such exemption from payment of transfer tax on death only relates to the principal place of residence. Where there are other properties involved, transfer tax is calculated on an ad valorem basis.  Such tax on death is very often a disincentive to executors/beneficiaries to winding up estates, many of which comprise real estate.

This if further compounded by the interest charges. Interest is calculated as per Paragraph 17(3) First Schedule of the Transfer Tax Act:
“6% per annum shall be paid upon any of the tax outstanding from and after the expiration of twelve (12) months of the date of death of the deceased, to the date of payment”.

Very often the beneficiary of property is deprived of the real estate as the executor is forced to sell  in order to settle the taxes and other duties. In some cases due to the high stamp duties the application for probate or letters of administration is not even filed to allow for the estate's representative to collect and distribute the assets. The effect of this is that there are many properties in Jamaica which remain registered in the names of deceased owners. Some consequences of this are:

  1. the property cannot be held as security for loans,
  2. the property cannot be sold or leased. 
  3. the asset therefore fails to contribute to significant economic activity.

As of May 16, 201, Per Shaw's initiative, transfer tax on death will now be  1.5%.coming down from 4% on estates where death occurred after August 2009. Note the interest rate is now higher than the tax rate. Something ought to be done about that. 

In respect of probate and letters of administration filed after April 27, 2011 stamp duties will be charged on a graduating scale beginning at $5000 for estates valued at less than $10 million and going up by increments of $5000 for every 9.99 million thereafter culminating at $25,000 for estates valued at $40 million and more. Now while these will no doubt lighten the tax burden of estates upon death, the time is early yet to forecast great gains or a significant boost in the economy.

Indeed there are detractors who claim that this incentive is only of benefit to the wealthy as a member of a middle class family who might be the beneficiary of  a two bedroom apartment valued at J$12 million  will still be hard pressed to find the funds necessary to pay the $180,000.00 to the tax authorities and that only covers transfer tax. The stamp duty, executor's commission and attorney's fees are not included. In such a case, it is my opinion that the government ought to embark on a serious education drive to encourage the public to understand the need to make their assets work for them and also to encourage their loved ones to engage in shrewd estate planning to ensure that their estates are not overburdened or swallowed up by taxes.