By NEIL HARTNELL
Tribune Business Editor
A Cabinet minister yesterday confirmed the Government is allowing a 90-day “transition period” so that foreign purchases of real estate valued at under $1m - and already subject to sales agreements - can close at existing VAT rates.
Michael Halkitis, minister of economic affairs, in a messaged reply to Tribune Business inquiries, said: “We will allow a transition period for transactions under contract and not yet closed. Ninety days.” His comments will likely reassure vendors and purchasers who had feared their deals would incur additional VAT they had not budgeted to pay if they closed after the new fiscal year begins on Saturday, July 1.
The Government’s move also aligns with the Bahamas Real Estate Association’s (BREA) call yesterday for just such a 90-day, or three-month, transition period so that all existing deals with signed sales contracts can be honoured at the present VAT rates before they increase to a uniform 10 percent come July 1 (Saturday).
“BREA’s immediate concern is that the sudden and substantial increase in real estate VAT could have unintended consequences and place an unnecessary liability on property owners, purchasers, real estate and legal professionals, as well as Inland Revenue and financial institutions, from the fall-out of existing transactions that were responsibly budgeted and secured by a contract, but will now be adversely affected by a sudden and unexpected increase in tax,” BREA said.
“BREA respectfully requests that the Government of The Bahamas consider extending the implementation date of July 1, 2023, by 90 days to October 1, 2023. This period represents the average period in which most existing real estate transactions would take to close. This will assist greatly in reducing transaction fall-out and other damages due to this unexpected expense.”
BREA’s statement refers to the VAT (Amendment) Bill 2023, which accompanies the 2023-2024 Budget. The legislation, which is due to take effect from July 1, 2023, quietly amends the VAT Act’s Third Schedule to ensure that “every deed of conveyance, assignment or transfer of real property to a foreign person” attracts a 10 percent VAT rate.
Given that all property purchases of $1m or more already attract 10 percent VAT on the acquisition price, only transactions involving foreign buyers for less than this amount will be impacted. The Davis administration, besides targeting a higher VAT rate on real estate purchases by foreigners worth less than $1m, has also hit the same segment with the 25 percent ($30,000) increase in the annual real property tax cap from $120,000 to $150,000.
However, the VAT adjustment, which the Bill’s “objects and reasons” confirms was “inserted to provide a rate of 10 percent where there is a transfer of real property to a non-Bahamian”, comes just a year after the Government changed the rates for all purchasers - Bahamian and foreign - for deals valued at less than $1m by inserting a so-called ‘sliding scale’.
While all purchases worth $100,000 or less remained attracted 2.5 percent VAT on the purchase price, the Davis administration in the 2022-2023 Budget lowered the rate on transactions worth between $100,000 and $300,000 from 10 percent to just 4 percent. Similarly, for deals valued between $300,000 and $500,000, the rate was dropped to 6 percent; for purchases between $500,000 and $700,000 to 8 percent; and those between $700,000 and $1m have been taxed at 9 percent.
The latest reforms take the benefits of those lower VAT rates away from foreign buyers of Bahamian real estate including, it would appear, permanent residents. Attorneys and realtors, speaking to Tribune Business prior to yesterday’s statement from Mr Halkitis, voiced concern that such transactions under $1m could be disrupted - and potentially derailed - as the parties would have to find additional money to cover a higher VAT rate they had not budgeted to pay.
Phillip Kemp, a BREA director, told Tribune Business that while Mr Halkitis’ statement was “good news” the Association’s concerns and statement remained valid until it, too, received written confirmation of the Government’s position. He revealed that he was personally involved in two transactions, involving foreign buyers and real estate valued at under $1m, that would be affected without a transition period.
“I’m caught up in a transaction now with two parties, a husband and wife, and the husband is a foreigner. They’re down to the nitty gritty in terms of bank fees, and they’re going to be affected come July 1 if this thing is not extended,” Mr Kemp told Tribune Business.
“It’s not just foreigners that this will impact. One is a Bahamian, one’s a foreigner. They are a young couple that has been struggling. These are young professionals who have been looking for two years, had some pitfalls with financing and finally got sorted out, but are counting the coppers and this thing opened up in the last month. They trusted in the process, and now have to find more money because the vendor will not take on additional tax. It’s heart-breaking.”
Mr Kemp also revealed that he is presently handling another transaction involving a foreign buyer, and real estate valued in the $100,000 to $200,000 range. He added that the buyer is “looking to retire” and finance the purchase from their savings, but added that without a transition period they would have to find extra VAT money “with no warning”.
Andrew O’Brien, a real estate attorney and partner with the Glinton, Sweeting & O’Brien law firm, told Tribune Business it “just makes complete sense” for the Government to provide a transition period but, prior to Mr Halkitis’ communication to this newspaper, no confirmation had been forthcoming.
“It’s just good business practice. You need to give people some warning,” he added. “The law firms, a lot of our contracts build in some flexibility, so if there is a change during the course of the transaction the parties may split it or one party agrees to take it on, but it leaves a bad taste in everyone’s mouth.... Ultimately it makes The Bahamas less desirable if we don’t build some flexibility so people can have comfort they’re going to pay what they anticipated.”