Pre-construction and reassessment of Stamp Duty

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As I’ve mentioned in numerous articles, the real estate market in the Cayman Islands is continuing to boom. One of the new challenges with a market that is enjoying relatively rapid appreciation is the impact on Stamp Duty especially when it comes to pre-construction properties. This is a situation that Cayman investors now face more than anywhere else in the world.

Historically the government has accepted the developer’s price as the completion price and Stamp Duty was charged on that even with appreciation in between but this has changed. As the government is heavily focused on finding revenue anywhere especially given the impact caused by having literally no tourism for almost a year and a half, the government has confirmed they will be assessing Stamp Duty upon the value of the property at completion.

This is unlike other countries such as Canada where GST (Goods and Services Tax) for a new property is calculated based on the purchase price outlined in the purchase agreement versus the property’s assessed value upon completion. Given today’s marketplace is it almost certain that a pre-construction property with a purchase agreement signed a year or more ago will be assessed at more than the purchase price.

When you contract to purchase a pre-construction property, you signed the contract and put your initial deposit down which is usually 10%. You have firmed up the details of the contract and thus purchase price as well as organized the appropriate financing for the purchase. Your financing approval would be based on the purchase price as well as the projected closing costs including the 7.5% Stamp Duty. During the time between signing the contract and taking possession, you are enjoying the appreciation that has happened during this time, but the challenge comes when paying Stamp Duty.

Now, you do have the option to pre-pay the Stamp Duty upon registration of the contract but the downside of that is if the property hasn’t started or heaven forbid the development didn’t complete, you would lose those funds. Additionally, most people don’t want to put out 7.5% of the purchase price up front when they may not take possession of the property for several years especially when putting down the initial deposit.

The biggest challenge with this Stamp Duty change will be with respect to financing. You’ve worked with your bank and determined the financing you will need to purchase a specific property, have been approved and signed the purchase agreement. Now the goal post has been moved.

The 7.5% Stamp Duty could amount to anything from 25% of the cash needed all the way up to 60% which potentially has a huge impact on purchasing, which is even further exacerbated in the examples outlined below.

For example, if the price of the property you have contracted to purchase is $700,000 that would mean you would pay $52,500 in Stamp Duty. But, if during the time between signing the purchase agreement and the possession date, the government has now assessed that property at $840,000, a 20% increase which in this current market is completely reasonable, your Stamp Duty liability would now be $63,000 which is a $10,500 increase. If that same property increases in value by 30% to $910,000 the Stamp Duty will now be $68,250 which is an increase of $15,750.

In some cases, this increase in Stamp Duty will mean the difference between being able to afford to purchase the property already contracted to buy and not being able to meet the increased cost. Most people when buying real estate put every penny they have into the purchase, and they often borrow for the maximum amount they qualify for. On the flip side, the reality is that salaries are not going to increase at the same level that property values are increasing thus creating a potential gap between available funds and purchasing requirements. Many people will not walk away from these purchases, but it could undoubtedly have an impact on other expenses such as buying new furniture for their new home.

I see this as a real issue for all buyers but particularly for lower income buyers who may not be first time buyers many of whom I’ve seen purchase residences in new developments. They took advantage of low, pre-construction prices such as $200,000 but now those same residences are being sold at $270,000 and they aren’t even built yet. This price increase alone will bump Stamp Duty by $5,250, which is a huge amount for a lower income buyer.

All of this equates to the fact that the entry price to purchase real estate in the Cayman Islands has gotten even higher pushing many hopeful buyers out of the market completely or in a position where they cannot afford to move somewhere new. The reassessment of Stamp Duty doesn’t just affect buyers, it will affect renters. If someone has purchased an investment property to rent, they will now need to charge more for that same residence to pay for their increased out of pocket costs.

It’s one thing if someone has realized the return of the increase in value of the property but they will only do so upon the sale. Therefore, they are basically being asked to pay for an appreciation they have not yet benefitted from. This impacts everyone. The issue lies in how government assesses value, which they currently say is determined as at the date of possession.