The Danish Government’s residential property tax reform becomes effective in 2021. What is the impact on overall residential property taxes when e.g. taxation is based on the actual market value of land?
This article was updated on 13 June 2017.
Residential property tax reform hits major cities
When the Danish Government’s recently adopted residential property tax reform becomes effective in 2021, real property in the largest cities will be subject to substantial hikes in overall residential property taxes. Land taxes will soar when the future taxation basis is to increase in step with the actual market price of land unless the municipalities decide to cut the land tax rate.
On 2 May, the Danish Government succeeded in negotiating a new taxation regime for Danish ownership housing. The new regime proposes to make the taxation of ownership housing subject to progression like the taxation of labour. Both property value tax and land tax (grundskyld) will be affected by the residential property tax reform. The general idea of the reform is to better align overall residential property taxes and the actual market value of a given property. Consequently, the reform is to be viewed in the context of the introduction of a new public property valuation system. Because of the new valuation system, Danish homeowners will receive new public property valuation notices as from 2019.
The new residential property tax reform reduces the basic property value tax rate from 1% to 0.55%. In addition, the progression limit is changed to the effect that ownership housing valued in excess of DKK 7.5m is subject to 1.4% marginal tax. As an admission that public property valuations may in some instances be flawed, a principle of caution is introduced. The taxable value of a property is therefore calculated at 80% of the public property valuation. Accordingly, the taxation basis of a property with a public property valuation of, say, DKK 7.5m, is DKK 6m. The property value tax reform becomes effective end-2020/start-2021, when the present freeze on residential property taxes lapses. To shield existing homeowners from a sudden tax shock, it was decided to grant them a tax discount to the effect that they will not be required to pay higher property value taxes than they do today. However, the tax discount expires when a homeowner vacates the dwelling in question.
Similarly, an automatic freeze is introduced on tax increases driven by higher land taxes, with these increases not being triggered until the dwelling is sold. Land tax is not comprised by the existing residential property tax freeze effective in 2018, 2019 and 2020. As from 2019, when the new public property valuation system is introduced, land tax will effectively increase in step with the current market value of the land. Dwellings acquired in or after 2021 are automatically covered by a tax freeze on all increases in both land tax and property value tax. Thus, the actual tax burden will not increase for as long as you own the dwelling in question. In short, the higher taxes are imposed only in connection with a sale.
Sharp increase in land tax looming ahead for apartments
Irrespective of the change in tax rates and the progression limit, the crux of the matter is that future taxation will be based on a public property valuation rate intended to reflect actual market value. Today, property value tax is determined on the basis of the lowest of the following three values, (A), (B) or (C):
- (A) Public property valuation from 2001 plus 5%
- (B) Public property valuation from 2002
- (C) Effective public property valuation
According to the Danish Customs and Tax Administration (SKAT), some 95% of all homeowners today pay property value tax based on (A) or (B), with the residual 5% mainly constituted by owners of properties constructed after the introduction of the freeze on residential property taxes.
Today, the land tax is also determined based on the lower of the following two values, (1) or (2):
- Effective land value
- Previous year’s land value regulated by a specific percentage (land tax ceiling)
SKAT data show that some 90% of homeowners nationwide pay land tax according to (2).
Based on SKAT’s data on public property valuations of owner-occupied flats in Copenhagen and Frederiksberg, we have calculated the actual average tax burden, distinguishing between land tax and property value tax. Our calculations included owner-occupied flats subject to property value tax (A) and land tax (2), as these apply to most owner-occupied flats.
|Frederiksberg, as is||Copenhagen, as is|
|Public property value 2001 plus 5%, DKK per sqm*||15,683||14,435|
|Share of value in excess of progression limit, estimate**||3.6%||4.2%|
|Property value tax, low||1.0%||1.0%|
|Property value tax, high (>DKK 3,040,000)||3.0%||3.0%|
|Public land value, DKK per sqm (2001)*||1,154||1,051|
|Public land value, DKK per sqm (adjusted)***||2,422||2,206|
|Land tax rate||2.475%||3.40%|
|Land tax, DKK per sqm p.a.||60||75|
|Property value tax, DKK per sqm p.a.||168||156|
* Based on SKAT's property valuation statistics plus 5%
** Estimate by Sadolin & Albæk
*** Subject to adjustment at the adjustment rate applicable in 2003-2017
For instance, the calculations above show that the owner of an average 100 sqm owner-occupied Copenhagen flat today pays some DKK 7,500 p.a. in land tax and some DKK 15,600 p.a. in property value tax, or a total of some DKK 23,100 in annual property taxes.
Pursuant to the new residential property tax reform, a buyer of an owner-occupied flat in Copenhagen or Frederiksberg will be required to pay dramatically higher overall residential property taxes.
|Frederiksberg, 2021||Copenhagen, 2021|
|Actual market value, DKK per sqm*||40,216||35,234|
|Share of value in excess of progression limit, estimate**||0.3%||0.8%|
|Property value tax, low||0.55%||0.55%|
|Property value tax, high (>DKK 7,500,000)||1.40%||1.40%|
|Public land value, DKK per sqm**||8,000||6,000|
|Land tax rate||2.475%||3.40%|
|Land tax rate, DKK per sqm p.a.||198||204|
|Property value tax, DKK per sqm p.a.***||178||157|
*Based on the statistics of the Danish Association of Mortgage Banks, average market prices in the municipality in Q4 2016
** Estimate by Sadolin & Albæk
*** Allowing for the principle of caution
In the same scenario, the residential property tax reform will have the effect that a new homeowner will be required to pay some DKK 20,400 p.a. in land tax and some DKK 15,700 p.a. in property value tax, or a total of some DKK 36,100 p.a. in overall residential property taxes.
The calculations show that the property value tax, from an aggregate average perspective, remains largely unchanged for owner-occupied flats in Copenhagen and Frederiksberg. However, the new residential property tax reform will drive up land taxes quite considerably because taxation will be based on the current market value of the land unlike today when 90% of land tax calculations are determined by the land tax ceiling. Unless the City of Copenhagen and the City of Frederiksberg decide to lower the land tax rate, homeowners here are facing strong hikes in land taxes.