Before the budget speech for 2004, few would have imagined that capital gains tax upon the sale of inherited immovable property was to be introduced. However, during the budget speech for that year, the Finance Minister responsible during that period – John Dalli – had announced that the blanket exemption on any gains resulting from the disposal of inherited immovable property was to be abolished as from that date.
This announcement was certainly not well-met by the public since this meant an extra tax (in most cases 35 per cent) on any gain made on the disposal of any inherited immovable property. However, one cannot just criticise the government over this new rule since one knows the difficulties the Maltese economy is facing and tax revenues are a vital part of the government’s income. Most countries have an inheritance tax while most other countries also have a property tax which, presently, Malta does not have.
The taxation of capital gains on inherited property is found under Article 5 of the Income Tax Act and also in legal notice 5 of 2005. Such changes came into force as from 7 January 2005 through legal notice 5 of 2005 but with a retrospective application of these rules starting from 25 November 2003.
The dates on which the immovable property was inherited and furthermore the date on which the declaration causa mortis (deed of declaration) is filed, determine how the chargeable gain is to be taxed. This is shown below since one can divide the inherited property into the following categories:
Immovable property inherited before 25 November 1992 – ITMA Art 43 (1)(a)
Any immovable property which was inherited before 25 November 1992 and is disposed of after 25 November 2003 shall attract a seven per cent final withholding tax on the selling price of the immovable property and such withholding tax shall be paid within 15 days of the relative transfer.
Transitory provisions
Irrespective of which date the immovable property has been inherited, the said full and final payment shall be equivalent to five per cent of the selling price relating to the transfer of the said property where:
(i) the promise of sale agreement in respect of such transfer has been signed prior to 25 November 2003;
(ii) the said agreement has been duly registered at the Finance Ministry by 22 December 2003 and a certificate to that effect has been issued by the said ministry;
(iii) the relative deed of transfer is published by 31 October 2004;
(iv) the duty on the said deed is paid and the relative deed enrolled in the Public Registry by 15 December 2004.
Current provisions
Under the new rules, inherited immovable property is now taxable on the chargeable gain made when the property is disposed of. However, only property inherited after 25 November 1992 shall be subject to the following rules. The chargeable gain is computed by taking the selling price of the immovable property and deducting therefrom the cost of acquisition. The cost of acquisition shall include the following:
• The value declared in the deed of transmission causa mortis increased, where applicable, by the additional value declared in a deed of adjustment notified to the CIR before 30/06/05;
• Duty paid in terms of the Duty on Documents Transfers Act;
• Increase in inflation subject to certain rules;
• Maintenance allowance ;
• Other expenses not exceeding five per cent of the transfer price such as the estate’s agent commission.
An important point to be noted is that a transfer of inherited immovable property can never create a capital loss for tax purposes unlike the transfer of immovable property which was not acquired through inheritance.
However, a distinction has to be made as to when the immovable property was inherited – meaning, when the transmission causa mortis was duly filed to the CIR.
Property inherited between 25 November 1992 and 24 November 2003
It was a standard operation to declare the value of the immovable property on the deed of declaration causa mortis at a much lower value than the actual market value of the property when filing the said causa mortis. The death duty on a transfer causa mortis attracts a five per cent tax. Due to the under declaration one would be paying less tax since the five per cent is computed on the declared value. Since upon the eventual transfer of the said immovable no capital gains would arise, the fact that the amount declared upon inheritance was lower did not create any disparity.
However, upon the removal of the exemption upon transfer of inherited property and since the cost of acquisition is deemed to be the value declared on the declaration causa mortis a huge capital gain was to result in instances of under declaration on the deed of declaration causa mortis. The Finance Ministry acknowledged the problem and immediately took action by introducing a scheme whereby the declared value of the property can be adjusted upwards. Such scheme is in operation until 30 June 2005. This scheme is found under legal notice 3 of 2005 under the Duty on Documents Transfers Act.
This applies to property inherited between 25 November 1992 and 24 November 2003.
The new tax regulations can be summarised by stating that where the immovable property was acquired causa mortis between 25 November 1992 and 25 November 2003, the value of the immovable property shall be deemed to be the value declared in a notice given to the Commissioner in accordance with the provisions of the Duty on Documents and Transfers Act not later than 30 June 2005, taking into account any adjustment to the said value made in accordance with the Adjustments to Declared Value of Immovable Property Rules 2005 and delivered to the Commissioner by not later than 30 June 2005.
Provided that:
• If the said property is transferred after 25 November 2004 and before 30 June 2005, a deed of adjustment will only be considered if notified not later than the date of transfer;
• If the notice of deed of transmission causa mortis is not delivered to the CIR prior to the 30 June 2005 or prior to the transfer date, depending on the applicable circumstances, the CIR will determine the cost of acquisition by reference to the market value at the date of the transmission;
• The adjustment to the value of the immovable property can be made only in respect of property acquired causa mortis on or after 24 November 1992 and notice of that transfer has been given to the Commissioner in accordance with Article 51 of the Act before 25 November 2003.
Property inherited on or after 25 November 2003
The value of immovable property acquired causa mortis on or after 25 November 2003 shall be deemed to be the value declared in a deed of transfer causa mortis made not later than six months after the date of the relative succession. This means that upon eventual transfer of the property, the cost of acquisition of the immovable property shall be such value declared in the deed of transfer causa mortis.
It is important to point out that where the notice referred to above is submitted late (that is, after six months and 15 days from the date of transmission), the value of the property shall be deemed to be such value which, in the opinion of the Commissioner of Inland Revenue, represents the price which the property would have fetched had it been sold on the open market on the date of the transfer causa mortis.
This is also subject to two further conditions:
• If notice is given before the expiration of 18 months from the date of transmission, the determination by the CIR is subject to an appeal;
• If notice is given after later than the 18 months after transmission, the determination is not subject to an appeal.
Conclusion
These rules are rather complicated, thus following the pattern that most taxation laws are indeed complex. Leaving aside such an issue, the most important matter is the effect that the introduction of such rules has had on the general public and the prices of property in Malta.
Property prices have increased following the introduction of these rules since a person selling his inherited property will now try and include the tax element in the selling price when dealing with the buyer.
If everyone follows suit, then property prices will obviously increase. However, it is useless crying over spilt milk as these regulations have now been implemented and seem here to stay.
In my opinion, however, there should be a change in the law regarding this issue. For example, an exemption from capital gains tax upon the transfer of the inherited parents’ main residence should be introduced.
If this amendment were to be introduced, anyone selling his parent’s inherited residence would be exempt from capital gains tax. However, if such a person were also to inherit other properties including a block of flats and a showroom, that person would be subject to capital gains tax upon transfer of such property.
This will be in line with the other exemptions found under the Income Tax Act whereby the transfer of a person’s main residence is exempt from any capital gains tax.
Taxation should be progressive – meaning the more you earn the more you pay… obviously up to a certain limit.
Even such a change would not fully satisfy all taxpayers – however, removing the burden from those families who can afford less will help to improve the situation.
One thing is certain – these taxes are found nearly everywhere around the globe.
This is the reality we are living in.
Nikki Dimech CPA, ACCA, MIA, AMIT