- Cyprus Property News Magazine - http://www.news.cyprus-property-buyers.com -

Is a property only worth what someone will pay for it?

THE sharp fall in government revenues due to the economic recession seems to be putting pressure on the Land Registry (LR) to be much stricter in re-assessing bought property values, in order to maximise the amount of transfer tax it gathers.

In using its discretion to reassess the amount of transfer tax payable, the LR is relying on its own historical data in a way that cancels out the transfer tax benefit of a “bargain-buy”, and can result in double the expected amount being levied.

In three cases highlighted by the Sunday Mail, property buyers have been told that, for the purposes of calculating transfer tax, the value of their properties has been set by the LR at between 36 and 58 percent above the sale price.

The whole issue hinges on what the LR considers to be the “real market value” of a property when it decides that the declared sale price is lower than market levels. A careful definition of terms is therefore needed to understand the logic of the LR’s position.

A general definition of “market price” is the price as determined dynamically by buyers and sellers in an open market. The phrases “market price” and “market value” are often used interchangeably, based on the assumption that both price and value are determined when a transaction takes place in an open and competitive market.

From this point of view, one cannot talk of anything having a stand-alone value, because value depends upon transactions. No transaction means zero value, whatever the estimated value one has in mind or the selling price one expects.

Leaving aside questions of misrepresentation or fraud, a distinction between “market price” and “market value” can be made when the transaction prices set in an inefficient or unbalanced market do not reflect what is generally regarded as the “true underlying market value”. This can lead to a further distinction between “market value” and “fair value”. But any distinction will depend on reference to a set of specific criteria, involving both the seller’s and buyer’s perception and interpretation.

When the Mail spoke with LR Head Andreas Christodoulou, he appeared to make a distinction between property values and sale prices, saying that the recent slowdown in the Cyprus property market may have seen “a small fall in sale prices, but there has been no significant fall in values”.

When asked on what basis the LR will decide to assess the “real value” of a property rather than the sale value declared to it for the purposes of transfer tax, Christodoulou said that in the LR’s view, “the real value is the price for which it can be (immediately) resold in the open market.

Christodoulou was asked about one case (see Case 1 below) where there was a gap of several years between a sales contract being agreed and the transfer of title being requested, and involved a reassessed value that was 58 percent higher. He said that in such cases, the LR uses “detailed points of comparison held on its database of past sales” to decide on a value that in its view applied at the time of the sale.

Christodoulou added that the LR keeps comprehensive records of each and every legal property transaction anywhere on the island, so “at any given moment, the LR knows exactly what a property is worth, with a margin of plus or minus 10 percent.

However, Christodoulou indicated that the LR is responsive to what is currently happening in the market, saying: “Today, if someone declares a property to be worth €180,000 or €190,000 when we think it is worth €200,000, we won’t make an issue of it, so as not to discourage any possible movement in the market.

CPAG spokesman Denis O’Hare told the Sunday Mail: “It is only over the last nine months or so that we are hearing about such huge differences between the purchase price declared to the Land Registry and the value it uses for transfer tax purposes, so it is hard to avoid the conclusion that the state is using reassessment as a way to maximise transfer taxes because it is short of revenues due to the economic crisis.

Cyprus Land and Property Owners’ Association (KSIA) president George Strovolides said that under-declaring “is widespread, and everyone knows it. Unfortunately, some people ‘steal’ from the state, and we all end up paying for it. But for the LR to reassess a declared value by 40 percent or more – this should only happen if there is a clear case of suspected fraud, otherwise it is far too much.

He added: “In the current economic crisis, one can see how the LR might come under pressure to generate more revenues for the state, and then property-buyers agree to pay something more than expected rather than face the cost and trouble of making an appeal (to the Supreme Court).

But then the question becomes whether the right to reassess declared values is being abused. If the LR does not have specific suspicions of fraudulent declaration of value, then I believe what it is doing is unconstitutional. This power to reassess needs to be tested in court. If the LR is taken to court over this and it loses, then that’s the end of it.”

Strovolides said he was not in a position to say whether significantly higher reassessments by the LR are only happening in Paphos district. “There simply isn’t enough comparative data available that would allow such a conclusion to be drawn.

George Mouskides, Chairman of the Association for Promotion of Property Developments and General Manager of FOX Smart Estate Agency said: “This is one of those instances where the government has too much power, where it can ignore market forces and simply say ‘that’s the law’.

He added: “Using historical data to assess a taxable value is a distortion of the market. Five property units that are identical in every respect can still sell for different prices due to the law of supply and demand, but currently the LR can decide that they all have the same ‘real price’ rather than what the market has produced. Capital gains tax is paid on the declared value, so why not transfer tax? The law should clearly provide the detailed basis on which transfer tax should be assessed.

In a letter sent to Interior Minister Neoclis Sylikiotis at the end of last year, the CPAG gave details of specific cases to illustrate its concern that “the Paphos Land Registry (was) grossly overcharging on transfer fees”.

Acknowledging that the LR’s discretion to reassess market value is designed to prevent attempts to defraud the state out of legitimate taxes, CPAG argued that as “a property is only worth what someone will pay for it”, then this is “the true market value – decided by the market”.

O’Hare told the Mail: “If the LR is insisting that the ‘real value’ of the Ha Potami property (Case 1) is 58 percent higher than that declared in the sales contract, is the LR saying that the buyer and Aristo colluded in fraud?

Sylikiotis told the Mail that the Land Registry bases its valuation for a specific property on its record of past sales of properties with the same or very similar characteristics in terms of area in square metres, location and quality.

He insisted that, far from distorting the “market price” – i.e. that paid by the buyer in a given instance – the LR process smoothes out the variations caused by different sellers’ circumstances. “The LR process is laid down by law, so there is no question of someone being able to manipulate the price to their advantage”, he said.

Sylikiotis said that if a property buyer disagrees with the LR’s revaluation, “the law clearly lays down the appeal process, which can result in the Supreme Court reducing the amount of tax deemed payable by the LR.

An economist who is very familiar with the property market told the Mail that, as the Land Registry bases its “real price” on valuations, “there is always give and take involved. But when the Land Registry head says that at any given moment, the LR knows exactly what a property is worth, plus or minus 10 percent, he is on very weak ground. Nobody can know the real price of something without studying all the factors specific to its sale.

The LR is effectively saying ‘enjoy any discount you may have negotiated on your purchase price due to market conditions, but we’ll tax you on the basis we prefer.’ This is scandalous behaviour.

In Greece, for example, one can know the objective value of a property, based on published values per square metre, so that someone thinking of buying will at least have a good idea in advance what he’ll pay in transfer tax. Here, it’s who you know that counts.

The economist added: “The technology is there for the objective values to be published, the data models are there, but not the political will. But there needs to be objectivity in such things, so that the economy can operate smoothly and consumer doubt is removed.”

What the law says

According to the Land Registry’s document listing fees and charges, the rates for “fees paid by the transferee (i.e. the person in whose name the property is transferred)… on the sale price or on the market value of the property” is 3 percent on declared values up to €85,430, 5 percent on amounts between €85,430 and €170,860, and 8 percent for every declared euro over €170,860.

For example, if the declared purchase price is €153,774, the first €85,430 is taxed at 3 percent, giving €2,563 payable, and the next €68,344 is taxed at 5 percent, giving €3,417 payable. Total payable: €5,980.

But if the purchase is made in joint names, then it is treated as two tax assessments, and the effective value for calculation is halved, as follows: first buyer €76,887 at 3 percent = €2,306.61, and second buyer €76,887 at 3 percent = €2,306.61. Total payable: €4,613.22.

However, a note in the Land Registry document states: “Where, in the opinion of the Director, the declared sale price is below the market value (as at the date of the agreement), such market value upon which the fees are payable shall be determined by the Director of the Department of Land and Surveys. The transferee is entitled, upon payment of the above fees, to apply to the Supreme Court to contest the Director’s decision.

Case 1

JS bought a property in Ha Potami (Paphos district) from Aristo Developers in 2002 for C£171,940 (around €294,000). When he applied for the title deeds in 2009, he was told by the Paphos LR Office that its assessed 2002 value for the property was €465,000 (58 percent more). This was eventually reduced to €420,000 after a site visit. Instead of the €11,278 he expected to pay, he was originally asked for €25,531 (over 126 percent more), and finally had to pay €23,531 (some 109 percent more).

JS told the Mail: “There was nothing of the current development there at the time, just two older villas, no roads, but markers for future builds. Seven other villas had their footings in place. We were taking a big risk. Just two months later, some friends bought their villa for €30,000 more. Anyone carrying out a site visit now would see that our villa now has a swimming-pool and a nice garden, and has other villas nearby.

The local lawyer acting for JS is well-known in Paphos district, and told the Mail she has represented some 15,000 clients in her many years of practice. She said: “I explain to buyers carefully that transfer tax is payable on the value of the property at the date of purchase, not the sale price, and the Land Registry may set a higher value than the purchase price.

Referring to recent cases of high reassessments by the Paphos LR, she said: “Because there is a recession, they’re not interested in reducing the valuations”. She added: “I’m not saying the government is cheating people, they are just being strict on the valuations.

Case 2

VR bought a property in the Paphos district for €273,000, but the Paphos LR Office reassessed the value at €375,000 (over 37 percent more), which it then revised to €350,000 (some 28 percent more).

VR told the Mail: “Our house has the same average square meterage as the other 13 properties, but there is a big difference in interior quality between ours – which was part of the first of three batches built, with the worst view – and the others. The six houses with the best view also have four bathrooms, Italian kitchens and marble floors, which as pensioners we could not afford.

He added: “When we initially refused to pay the higher transfer tax, we were taken to see a lady referred to as a manager. We were told that a court appeal would take approximately three months, with no guarantee of a discount or that the inspector wouldn’t find it necessary to impose a further increase. Needless to say, we have paid the revised sum and came away knowing that at least we now really own our land and home.

Case 3

DT bought a property in an eight-property development in the Paphos district for C£151,000 (€258,000), but the Paphos LR Office reassessed the value at €350,000 (some 36 percent more).

In his appeal letter sent to the LR Office, DT pointed out that two other purchasers of properties in his development had paid transfer tax which the LR had calculated immediately based on the original sales prices.

DT met the Manager of Paphos LR with his solicitor. “After some checking of the paperwork, they admitted to making a mistake – in fact, they apologised. They confirmed that the lower number was correct, so the original amount payable stands.