IVIE on UK real estate post-Brexit: unexpected surprise?

Article 10 March 2021 Experience: Real estate

As anyone who has purchased a UK property knows, the so-called ‘cadastral value’ does not exist in the UK. Taxes (on purchase, inheritance, etc.) are calculated on the basis of the market value at the time of calculation. However, following a specific request of clarification, the Tax Authority, in order to address the need to maintain uniformity of treatment within the countries of the European Union, has identified the value attributed to UK properties for the purposes of calculating the Council Tax (the municipal tax on dwellings) as a value that could serve as a taxable base. The Council Tax is levied on the basis of tax bands attributed to residential properties, and varies from city to city and district to district.

As anyone who has purchased a UK property knows, the so-called ‘cadastral value’ does not exist in the UK

Now, if the cadastral value of an Italian property does not reflect its market value at all, the Council Tax band value of a UK property is about as far from its actual market value as you can get, especially in London and the major cities. The Council Tax bands in England are still fixed at 1991 property values (and 2003 in Wales). By way of example, a property currently for sale in the London Borough of Kensington and Chelsea at an asking price of £3,250,000 falls within Council Tax band G, whose median value (taken as a reference by the Tax Authority) is £240,000.

Until 31 December 2020, the IVIE due on this property would therefore have been £1,824 per year (to be converted into Euros).

One of the various implications, more or less unexpected, of Brexit, resulting from the exit of the UK from the customs and tax territory of the European Union, affects precisely the pockets of property owners on the Island. Indeed, the Tax Authority, in the context of Telefisco 2021 has confirmed that from 1 January 2021 the chargeable value for IVIE purposes in respect of UK real estate properties will no longer be determined on the basis of the favourable value of the Council Tax band, but by reference to the general principle based on the purchase price or the cost resulting from contracts (and, absent such information, by reference to the market value).

Suddenly, the Italian tax cost of the London investment rises to around £24,700, an overnight increase of 1,254%!

Suddenly, the Italian tax cost of the London investment rises to around £24,700, an overnight increase of 1,254%! Not to mention that the profitability of the investment has most likely dropped in the last 12-18 months, due to the ongoing global pandemic and the consequent inability to travel internationally and plan holidays and stays.

This is certainly a bad surprise for all investors and, by extension, for the attractiveness of the UK property market, which has never suffered in Italy. Hence, it will come as no surprise if the issue will be raised again and discussed in more detail, and hopefully reconsidered, given the impact on taxpayers’ pockets.

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