I thank the Chairman for the invitation to appear before the committee and for the opportunity to discuss the proposed changes to the LPT and answer any questions the committee may have on those changes. I am joined by Keith Walsh from the statistics and economic research branch of Revenue.
At the outset, I would like to clarify that the Department of Finance has responsibility for the policy and legislation for the LPT, which, as you know, is collected by Revenue. It is then paid into the Local Government Fund and does not form part of Exchequer receipts. Distribution of the LPT yield and matters associated with local government funding arise from Government decisions sponsored by the Minister for Housing, Local Government and Heritage. I am not in a position to discuss these. What I can do is provide a brief outline of the LPT and the proposed changes to the tax. The committee may wish to note that the Minister for Finance, Deputy Donohoe, is scheduled to meet the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach for pre-legislative scrutiny of the general scheme of the finance (local property tax) (amendment) Bill 2021 tomorrow, 7 July 2021.
The LPT was introduced in 2013 under the Finance (Local Property Tax) Act 2012 to provide a stable funding base for the local authority sector and broaden the base for taxation in a manner that does not directly impact on employment. The tax has yielded approximately €3.6 billion since 2013. The LPT is currently based on the property values that obtained on 1 May 2013. Revaluation of properties has been deferred on three occasions, namely, 2016, 2019 and 2020, which means that the LPT liabilities are still based on 2013 valuations. This has resulted in a situation whereby it has not been possible to bring new properties into scope. Properties built since 2013 are excluded from the tax.
There have been two reviews of the tax since its introduction: the Thornhill review of the LPT in 2015; and the interdepartmental review of the LPT published in 2019. The 2019 review was conducted by an interdepartmental working group, chaired by the Department of Finance and consisting of senior officials from this Department, the Departments of the Taoiseach, Public Expenditure and Reform and Housing, Planning and Local Government and the Office of the Revenue Commissioners. Both of these reports considered, in particular, the effects of changes in property prices since 2013 on LPT liabilities and the impact of these on taxpayers’ liabilities following revaluation of their properties. The 2019 review considered a number of methods or scenarios for collecting LPT liabilities with a view to achieving relative stability in LPT liabilities for taxpayers following revaluation of properties.
Earlier this year, the Minister asked us to consider options for the reform of the tax in the context of the programme for Government commitment to bring forward legislation in respect of the LPT on the basis of fairness and the fact that most homeowners will face no increase in their LPT liability, and to bring new homes that are currently exempt from the tax into the system. Our starting point for this work was the scenarios considered under the 2019 review. These scenario analyses were based on a data set assembled by the Revenue Commissioners from the property price register combined with Central Statistics Office, CSO, and Revenue data and Department of Finance forecasts.
I should note that the analyses can provide only a broad picture of the estimated effects on taxpayers. They are based on economic modelling and the predicted outcomes can offer only indicative rather than guaranteed outcomes. A key challenge encountered during both the work on the 2019 review and the more recent analysis is the significant variation of property price increases geographically and, in particular, the uneven pace and rate of increases in residential property values throughout the country since the original valuation on 1 May 2013. Following extensive engagement at both official and political level, the Government agreed on a modified version of scenario 5 of the 2019 LPT report as the basis for the calculation of future LPT liabilities. A general scheme of a Bill which provides for this approach, as well as other amendments to the tax, was published on 2 June 2021.
The original scenario 5 as proposed by the interdepartmental group increases all of the valuation band thresholds by 80%, based on the expected average property price between 2013 and end 2019, as estimated at the time of 2019 review.
The midpoint of each band increases correspondingly and the rate is reduced to leave the liability in each band unchanged. The widening of bands provides a smoothing effect whereby the probability of a taxpayer moving bands is reduced.
The approach outlined in the general scheme of the finance (local property tax) (amendment) Bill 2021 maintains the number of bands at 20, which are widened by 75%, a lower rate is applied and the current rate structure is maintained. However, to mitigate the effects of the changes for lower value homes, bands 1 and 2 are fixed. Band 1 is values up to €200,000 and, band 2, from €200,001 to €262,500, with the LPT charge for these bands fixed at the current rates of €90 and €225, respectively. This results in the vast majority of properties currently in band 1 remaining in the new band 1 and continuing to pay the same amount. A higher midpoint rate will be applied to properties above €1.05 million for values which will fall in bands 12-19 and a third higher rate will be introduced for properties valued above €1.75 million. These fall into band 20.
Other changes proposed to the tax include that all new residential properties built between valuation dates will be brought within the tax and retrospectively valued as if they had existed on the preceding valuation date. Property valuations will be reviewed every four years rather than every three years as at present. The income thresholds for LPT deferrals will be increased to €18,000 for a single owner and €30,000 for a couple in line with the recommendation of the 2019 review. The rate of interest on deferred LPT will be reduced from 4% to 3%. From inception, the LPT has been underpinned by the principle that keeping the number of exemptions low helps to keep the tax rate low for those who are liable to pay it. The exemptions for first-time buyers and homes in unfinished estates will be allowed to lapse and the exemption in respect of pyrite-damaged properties will be phased out. A new exemption is being introduced for homes in Mayo and Donegal damaged through the use of defective concrete blocks in their construction.
The yield for 2022 under the revaluation approach as outlined and set out in the general scheme of the Bill is provisionally estimated to be €560 million, but before any local adjustment factors are applied. As LPT remains a self-assessment tax, the final actual yield will be determined by the valuations returned by property owners.
Finally, while not a matter directly for the legislation or the Department of Finance, the Minister for Housing, Local Government and Heritage, Deputy Darragh O'Brien, and his colleague, the Minister for Public Expenditure and Reform, Deputy Michael McGrath, felt it was important to address the third element of the programme for Government commitment in the Government decision. This part of the commitment is to discontinue the equalisation contribution from local authorities and allow all local authorities retain 100% of the LPT that is collected in their local authority area. Local authority allocations are decided in advance of collection, based on estimated yield in individual areas for the following year. Therefore, as this is a valuation year, this process and the local adjustment factor decisions this year will, of necessity, take place before local authorities receive the up to date information on the expected LPT yield in their areas following the revaluation, as well as the addition of new properties to the LPT system. In light of this, the Department of Housing, Local Government and Heritage advises that it is intended to retain the 80-20 model for the 2022 process and to move to the 100% local retention model from 2023. This will mean that local authorities and the Exchequer will have the benefit of the post-revaluation information to inform these decisions. I am happy to take any questions that the committee may have on LPT.