Saturday, 7 September 2013

"Pop go Geneva house prices"

Emailed in by the Sumo King, from the FT:

It’s been a long time coming, but Geneva property owners desperate to sell are finally beginning to slash prices after a summer season characterised by a bitter standoff between buyers and sellers...

Some market specialists are blaming uncertainty over future tax breaks for wealthy foreign owners...


Aha, thinks the reader. Those dastardly Swiss Commies will have increased property taxes or something, attacking our wealth etc.

Nope:

As the Telegraph explained this week:

"The system allows foreign nationals to pay a flat fee — called a forfeit – to their local canton. It is worked out based on the rental value of their property rather than their income or assets and is paid in lieu of ordinary wealth and income taxes.

Ordinary federal and cantonal tax rates are applied to the rental value and there is no obligation on forfeit holders to declare worldwide income or assets The forfeit tax provisions are specifically aimed at financially independent persons who are not seeking employment in Switzerland – so those taking advantage of it are not allowed to earn an income there."


What the 'forfeit' system boils down to is this: they take the rental value of the home you live in, times it by five, use that as a proxy for your total income and charge (say) 35% income tax on it. Rents are capitalised at a multiple of (say) twenty, so if the home you live in has a rental value of CHF 50,000, it is worth CHF 1 million and you pay CHF 87,500 tax.

In other words, this is like Domestic Rates or Land Value Tax of 8.8% of the selling price, end of discussion and no back-chat, no further tax payments demanded.

Really rich people love this system of course, they don't mind paying this tax if they spend less than a fifth of their total income on rent or if their annual income is more than a quarter of the value of their home, because they are still paying less tax than they would be anywhere else.

What these people are worried about is that the 'forfeit' system is going to be scrapped and they will have to pay tax on their world-wide incomes instead, , meaning that they will have pay a lot more tax if they decide to stay in Switzerland.

So what lessons do we learn from this?

1. Really rich people don't mind paying LVT and they hate declaring their incomes and paying income tax.

2. Ultimately, all taxes are borne by landowners. A really rich person who was renting a home in Switzerland and paying the forfeit can now reassess the position and go elsewhere (or haggle a lower rent to compensate him for the higher tax bill); it is his landlord who takes the hit in terms of lower selling prices and/or lower rents.
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The UK has something vaguely similar to the 'forfeit', but it is done in the usual cack-handed British fashion. Non-domiciled individuals can opt to pay a flat fee of £30,000 or £50,000 a year each in return for not having to pay tax on their world-wide income. Only about 5% of 100,000 registered non-doms pay this tax, the rest just pay tax on all their income just like anybody else.

If the non-dom levy were based on the rental value of the homes they own or live in, this would raise a lot more revenue because lots of really rich people would be flocking from Geneva to London to pay it. Thought experiment: what happens if the UK decides to cut down on the administration, scraps taxes on income or private wealth and just says that everybody just pays tax based on the rental value of the homes they live in..?

7 comments:

Ben Jamin' said...

Yeah but, rich people will just avoid it by living in Neath or a caravan or something.

What if they live underground like some of the people you see on Grand Designs? How you gonna charge the LVT then eh?

Mark Wadsworth said...

BJ, if they move to Neath then they are not really "avoiding" it, that's like saying if somebody gives up smoking he is "avoiding" paying tobacco duty and no longer paying his fair share.

The rent for caravan pitches is broadly in line with what LVT on residential land would be, it's just that the pitches are much smaller and caravan parks tend to be in lower-rent areas.

And the cave dweller will have to pay LVT the same as the flat dweller. The fact something is not at ground level is by the by. We know that these super-snobs in central London build really deep basements for huge amounts of money. So caves can be worth a lot of money.

Morgan Charles said...

BJ, have you ever been to Neath? There is a reason why property is cheap there. No rich person in his right mind would want to live there.

Anyway the reason that LVT works as a progressive tax is that it where people want to live is where land costs the most and, er, people want to live where people want to live and are prepared to pay to satisfy that want. The fact that there will always be rich misers who are prepared to endure discomfort in order to save money is neither here nor there, they are as probably as uncommon as the Poor Widow in a Mansion, the Mermaid, or other mythical beasts.

Mark Wadsworth said...

MC, that's a good point about rich misers.

In theory, Michael Schumacher could have rented a two-bedrom flat in a tower block for CHF 10,000 a year, paid CHF 20,000 a year tax and have done with it.

I'm quite sure he lived somewhere a little bit more substantial than that.

Oh, what a surprise, he does.

The Stigler said...

Mark,

The interesting thing about Schumacher's house is that it's in a bit of Switzerland which I think it quite cheap, as it's miles from the major population centres.

That's the thing with certain types of people and businesses and where LVT really scores: people who can live anywhere can't just live in Switzerland or the UK, they can live almost anywhere within those countries. Most authors don't live in London - they live all over the country, because most places are nicer and have cheaper housing.

If we had LVT, we'd get some of those F1 drivers who live in tax havens to move here. Probably not the ones who want the Monaco lifestyle, but the more settled ones might decide that living in a pile in Northants, near their team gives them a better quality of life.

Mark Wadsworth said...

TS, I do not know precisely where it is, I do know that Schumacher was a beneficiary of the 'forfeit'.

As to the 'Monaco lifestyle', that's not what they are paying for. They are paying for the tax breaks.

A nice flat in Monaco costs you EUR 3 million. The town of Nice is twenty minutes along the coast with the lovely little railway, a ticket costs you EUR 3, and a nice flat there costs you "only" EUR 300,000.

That extra EUR 2.7 million is the value of the income tax some people can save by living in Monaco (a concreted over hell-hole, if you ask me, Nice is much nicer).

Kj said...

The thing though, when rich people live out in the country, they tend to exploit low land prices by having lots of lots of land.

MW: Monaco isn´t my cup of tea either, but that goes for most places that russian oligarch wives instinctively love.
Switzerland in general is a nice place though, and like clockwork they find excellent ways of bringing in rich folks, like the forfait. The cool thing is that it´s a cantonal option, so voters have been willingly keeping this option on the books because they know it´s for their own benefit, and only recently has lefties managed to rustle up enough envy to remove it.