I move: "That the Bill be now read a Second Time."
In my remarks I will briefly outline the background to the introduction of the local property tax, its position in our overall taxation system and why it should be maintained but in a reformed structure. As the introduction of a property tax represented a major structural change in the tax system the local property tax was considered in depth in 2012 by an interdepartmental group chaired by Dr. Don Thornhill. Among other contributions to the debate on the optimal design of a property tax, the interdepartmental group noted the 2009 Commission on Taxation's proposal for an annual residential property tax to be self-assessed and banded by property valuation.
The design group considered that under a market value approach applied to housing, the market value of a residential property would be related to the characteristics of the building itself, the site on which it was located and the features and amenities of the neighbourhood. There would be a relationship between the market value of a house and the benefits to the owner in terms of enjoyment of the amenity value of the properties. The group proposed a tax that would contain limited exemptions and reliefs. It was introduced in 2012 and is collected by the Revenue Commissioners. The local property tax is the largest extension of self-assessment in the history of the State, with more than 1.3 million taxpayers obliged to file local property tax returns and pay the tax in respect of approximately 1.9 million properties. The local property tax has two objectives. These are to broaden the domestic tax base and replace some of the revenue from transaction-based taxes with an annual tax.
In 2015, Dr. Thornhill was engaged to conduct a review of the local property tax. In line with one of his recommendations, the Government agreed to postpone the revaluation date from 1 November 2016 to 1 November 2019. This postponement meant that property owners continued to have their properties valued for local property tax purposes on the basis of their 1 May 2013 declared valuation and were not faced with significant increases in their local property tax liabilities in 2017, 2018 and 2019.
I initiated a further review of the local property tax which reported to me in 2019. I considered that it was essential that the principle that formed a central part of the terms of reference for the 2015 review of local property tax, which was relative stability in local property tax payments over the short and longer terms, would inform the deliberations on the matter. The review group reported in April 2019 that it had not found it possible to deliver on the maintenance of the relative stability objective for all taxpayers against a background of significant but geographically uneven variations. I deferred that valuation to 1 November 2020. Absent any change in the local property tax legislation, the valuations of properties on 1 November 2019 would have been the basis for calculating local property tax liabilities in 2020 and beyond. This would mean that 27% of residential property owners would see an increase of between €101 and €200, 28% would experience increases between €201 and €300 and 30% would see higher increases.
The Bill arises from the programme for Government, which includes a commitment to bring forward legislation in relation to the local property tax on the basis of fairness and that most homeowners will not face an increase in their local property tax. It is necessary to have this legislation enacted before the summer recess. This is required to enable the Revenue Commissioners to make the essential technical preparations to implement the various changes to the local property tax regime that are contained in the Bill before the valuation date of 1 November 2021. In the absence of this legislation, revaluation would take place on 1 November 2021.
Ideally, legislation to give effect to reform of the local property tax would have been enacted in 2020. However, the process leading to the formation of the Government and finalisation of the programme for Government, not to mention the consequences of the pandemic, meant there was not sufficient time to implement the commitments during the remainder of 2020. This, therefore, led to a third deferral, with the revaluation date moved to 1 November this year.
Home owners, especially perhaps in urban areas, may have concerns over increasing property prices since 2013 and the effects of this on their local property tax liabilities. It is important to bring a level of certainty to this area, which is another reason it is essential to have the amending legislation enacted. The local property tax was introduced in 2013 and was designed to serve a dual function. As I noted, one function is to provide a stable funding base and to deliver structural reform through broadening the base for taxation.
It is important to note that the Bill does not deal with the third element of the programme for Government commitment concerning local authority funding and, in particular, the equalisation contributions from local authorities and the decision to move to a 100% retention model. I will work with my colleagues, the Ministers for Housing, Local Government and Heritage and Public Expenditure and Reform in the 2023 and 2024 budgetary cycles.
The most noteworthy proposal in the Bill is a revised method for calculating local property tax liabilities, which is set out in section 24. The 2019 local property tax review analysed five scenarios broadly based on a €500 million target yield excluding any local adjustment factor. The analysis is based on economic modelling and the predicted outcomes can offer only indicative conclusions. A key challenge encountered during both the work on the review and the more recent analysis is the significant variation of property price increases geographically and, in particular, the uneven pace and rate of increase in residential property values throughout the country since the original valuation on 1 May 2013. A guiding principle informing the design of the local property tax is simplicity for taxpayers and for Revenue, which collects the tax. In this regard, the new basis for calculating local property tax liabilities builds on the existing band structure and is a variation of scenario 5 of the 2019 local property tax review.
The new approach maintains the number of bands at 20. Band 1 is expanded from €1 to €200,000 and band 2 contains values in the range €200,000 to €262,500. The other bands are widened by 75% to create bands of €87,500. For properties in bands 3 to 11, inclusive, a mid-point rate of 0.1029% will be charged. At present, a higher rate applies to properties valued above €1 million, with the first €1 million charged at 0.18% and everything above that at the higher rate of 0.25%. Properties are charged on the self-assessed value at individual property level. Under the proposed variation of scenario 5, it is likely that owners of high value properties with values over €1 million would benefit from reductions in local property tax liability due to the widening of the bands and the reduced rate. To address this, a higher rate will be applied to properties above €1 million by charging a higher mid-point rate on bands above €1.05 million and introducing a third rate for properties valued above €1.75 million. Therefore, properties in bands 12 to 19, inclusive, are charged a mid-point rate of 0.1029% on the first €1.05 million and 0.25% on the balance over €1.05 million. Properties in band 20 are charged on individual property values as before, which is to say 0.1029% on first €1.05 million, 0.25% between €1 million and €1.75 million and 0.3% on the balance.
An important principle underpinning the tax is that the number of exemptions is low, which helps to keep the tax rate low for those who are liable to pay it. Sections 10 and 13 to 15, inclusive, of the Bill accordingly provide that the exemptions for first-time buyers and homes in unfinished estates will lapse. Section 16 provides that the current exemption in respect of pyrite-damaged properties will cease to apply for new applicants after the end of the two-year period following the enactment of this Bill. Any taxpayer qualifying before that date may avail of the exemption.
In regard to damaged properties, the Government has been very active in addressing the problem of pyrite damage and the more recent manifestations of mica-related damage in some western counties. Since 2014, approximately €166 million has been provided for the pyrite remediation scheme for certain eastern counties and Limerick. I understand that more than 2,800 applications have been received under that scheme and, so far, approximately 2,380 dwellings have been included. In 2020, 1,866 properties were exempt from local property tax, LPT, under that provision. Section 18 of the Bill provides for a similar temporary exemption from LPT for homes that have been damaged as a result of the use of defective concrete blocks in their construction and whose owners are eligible for the defective concrete blocks grant scheme. The period of exemption will be six years, on a similar basis to the current pyrite exemption.
Section 20 provides that property valuations will be reviewed every four years rather than every three years. This is to achieve a balance between the timely capture of changes in the property market and the need to limit compliance costs. It also assists the regular addition of new properties into the LPT charge.
Section 21 provides that all new residential properties built between valuation dates will be retrospectively valued as if they had existed on the preceding valuation date. New properties become liable for the LPT charge at the next liability date, which is the following 1 November, and will be valued at the previous valuation date, 1 November 2021. Revenue will provide assistance to property owners to determine this value.
Section 38 implements the review group recommendation that the income thresholds for LPT deferrals be increased to €18,000 for a single owner and €30,000 for a couple. Section 37 provides for a reduction in the rate of interest on deferred LPT payments from 4% to 3%.
Currently, properties vacated by their owners due to illness may be exempt from LPT. This exemption applies to a property that was occupied by a person as his or her sole or main residence and has been vacated by the person for 12 months or more due to long-term mental or physical infirmity. An exemption may be available in situations where the property has been empty for less than 12 months if a doctor is satisfied that the person is unlikely to return to the property. In both cases, the LPT legislation currently provides that the exemption applies only where the property is not occupied by another person. I consider this to be a misaligned incentive with potential unintended consequences. Section 9 amends section 5 of the Finance (Local Property Tax) Act to allow a property that has been vacated by a liable person due to long-term mental or physical infirmity to be occupied by another person, who is not a liable person in respect of the property, without losing the exemption. In addition to freeing up residential properties for rental, this measure will also enhance the security of premises and assist with the maintenance of homes for vulnerable individuals.
Local authorities have the discretion to increase or decrease their LPT allocations via the local adjustment factor, LAF, facility by up to 15% every year. This remains unchanged under the Bill. Local authorities must notify their LAF to Revenue by 30 September if they want the adjusted rate to be effective for the following year. The review group recommended that the LAF notification to the Revenue Commissioners should occur in mid-October, except in the year that property valuations fall due for revaluation. In that instance, the LAF notification date should be 31 August at the latest to facilitate Revenue's processing of the required notification procedure. This change is provided for in section 27 of the Bill and is in response to concerns expressed by local authorities in regard to the timing of the decision on the variation of LPT rates, which is required to be sent to Revenue on or before 30 September in the year in which the relevant liability date falls. This concern centred on the necessity to make the decision on LPT variation in isolation from other budgetary decisions.
Section 29 provides that where the qualifying conditions for exemption cease to be met during a valuation period, LPT can start to be charged based on the property's value at the preceding valuation date. Currently, a property that is exempt on the valuation date continues to be exempt until the following valuation date, regardless of whether the qualifying conditions for the particular exemption continue to be met. I consider this situation to be anomalous and inequitable. The changes proposed will be facilitated by the availability of the Revenue valuation guidance and the publicly available property price register. The effectiveness of this change will be enhanced by having reasonably short valuation periods and regular revaluations of properties, as I have outlined.
The Bill provides for a new section 39A to be inserted into the 2012 Act to provide for the inclusion on a return to be delivered to Revenue of limited information about vacant properties. The LPT return will now contain a limited number of questions in regard to whether a property is occupied as a dwelling on 1 November 2021 and, if not occupied, whether it has been unoccupied for more than 12 months and why. This information, together with that obtained from other sources, will be useful in considering the case for a vacant property tax.
The Bill contains a number of other measures intended to improve the administration of the tax. It also includes amendments in the nature of minor technical adjustments. These involve minor changes to definitions and requiring exempt properties to file returns. I thank Deputies for their attention and look forward to hearing their contributions on the Bill, which I commend to the House.