The Impact Of Taxation On Real Estate Transactions
Taxes are one of the ways through which the Government generates revenue to fulfill its responsibilities to the public, such as the provision of basic amenities and services. Taxes may be referred to as compulsory payments to the Government through any of its agencies. Taxes are payable on tangible assets such as cars and houses, and at the occurrence of particular events as with cash transfer or conclusion of a transaction. In a bid to diversify its source of revenue away from the oil sector, the Federal Government of Nigeria has focused on other sources and strategies, one of which is the imposition of new taxes and an increased compliance on those already in existence. The recently revamped stamp duties and instruments on which payments can be made is in line with this strategy.
The high value of real estate and high volume of transactions have led to it becoming one of the key areas where the new stamp duty regime is focused on. Instruments and documents such as Certificates of Occupancy (C of O), Joint Venture Agreements, Deed of Assignment, Power of Attorney, and Tenancy/Lease among others are now liable for Stamp Duty payment. The most significant of the stamp duty instrument introduced, by the nature of its popularity, is that on tenancy/leases which state that tenants are liable to pay a rate of 6% of their rent as Stamp Duty to the government. This represents an additional cost and may have ramifications on real estate transactions which are further examined.
Imposing a Stamp Duty on rents, depending on the tenure of the lease, increases the true cost of renting a property and in turn, increases the financial burden on the tenant. For the corporate tenants who leases multi-unit properties on the medium term and long term, the associated overhead cost of renting/leasing properties with the new Stamp Duty increases their recurring expenditure. This may lead to them considering owning their own property, as with ownership, they enjoy the intrinsic capital value from the property, which a lease does not have. Same may be applicable for individuals. With this, we may see an increase in demand for properties to be purchased than those to be leased.
High-end neighborhoods that already have a high vacancy rate like Ikoyi and Victoria Island in Lagos might not see any respite soon. The non-performance of the economy, borders closed to international travels (and by extension limited international trade) and the new taxes further increase the void rates of properties in these neighborhoods.
Before now, various tax laws have existed with little compliance to them, the machinery to ensure strict monitoring and compliance does not exist. The burden of remittance of the stamp duty to the coffers of the
government now lies on the landlords, the framework for remittance and ensuring strict compliance still remains vague at best. The sheer volume of properties and number of transactions makes it look like a veritable source of revenue for the government, but also ensures adherence to remittance will be difficult to enforce.
Close to half of the world’s wealth is tied to real estate. It therefore, remains a veritable source of revenue for the government if properly exploited. The newly introduced Stamp Duty regime can significantly aid the government’s quest in this regard if properly exploited and appropriate measures put in place for harnessing it.
By ESV Olusanjo Fawole and Nnennaya Awoyokun for The Research and Development Sub-committee, NIESV Lagos State Branch.
Fn: 0.78% of rent paid on leases with tenures less than 7 years, 3% of
rent paid on leases with tenures above 7 years but less than 21 years
and 6% on rent for lease tenures above 21 years