February 3, 2023
Is it best to keep your head down when under attack? The flood of measures introduced by the Dutch government in the last few years is destroying the deregulated rental sector. The upshot is that fewer and fewer people can find an (affordable) home.
In a bid to make the tax system fairer, the government’s Tax Plans aim to tax box 3 assets based on the actual return that is earned on them. In 2026 a new system will be introduced that looks at the realised return on assets. Not such a bad idea in itself, as someone with a savings account earns a smaller return than a successful investor. The problem is that the policy goes too far.
Remind me again how this works?
Our tax system is divided into three boxes:
- Box 1: income from work and home;
- Box 2: income from substantial interests;
- Box 3: income from savings and investments.
If a homeowner lives in their own home (i.e. is an owner-occupier), this is taxed in box 1 (e.g. mortgage interest relief). When a residential property is not occupied by the owner, however, this moves to box 3. Until recently, the basis for the tax was not the income but the assets. Box 3 is taxed at a graduated (progressive) rate, with a set (notional) return on the assets and it’s this notional return that is taxed.
A tax credit applies to let residential properties in box 3, resulting in the application of a percentage rather than the full WOZ value of the property (for the purposes of the Valuation of Immovable Property Act); this is known as the vacant possession ratio.
Incidentally, a let residential property can only be included in box 3 if only a small amount of work is carried out for maintenance, rental and management. Rob Antonis wrote an earlier blog on this topic: how do I keep my real estate portfolio in box 3?
Transitional scheme 2023-2025
Before the new system comes into effect in 2026 (target date), a transitional scheme will apply that was introduced on 1 January 2023.
- The tax rate for 2023 is 32% and this will rise annually by 1%;
- The box 3 assets will be divided into three categories. For 2023, the notional returns on these are considerably higher:
- Bank and savings account balances and cash: 0.36%;
- Investments/other assets: 6.17%;
- Debts: 2.57%;
- The vacant possession ratio will be cut by unprecedented percentages in 2023. As a result, the tax credit for let residential properties will be smaller and a larger portion of the property’s WOZ value will be taxed.
Ratio of annual rent versus WOZ value
| More than | Less than | Current vacant possession ratio | New vacant possession ratio |
|---|---|---|---|
| 0% | 1% | 45% | 73% |
| 1% | 2% | 51% | 79% |
| 2% | 3% | 56% | 84% |
| 3% | 4% | 62% | 90% |
| 4% | 5% | 67% | 95% |
| 5% | 6% | 73% | 100% |
| 6% | 7% | 78% | 100% |
| 7% | – | 85% | 100% |
| Source: rijksoverheid.nl |
Vastgoed Belang, an association that represents the interests of private property investors, has calculated the impact on residential property investors for a range of scenarios. We don’t want to give too specific an example here as too many factors can influence the outcome.
However, Vastgoed Belang has calculated the repercussions for a landlord with a single mortgaged, let residential property. The calculation shows that this homeowner’s box 3 tax bill will increase from approx. €1,192 to €3,559. The return after tax on letting the property falls from 3.43% to 0.49%.
It doesn’t take much effort to find examples that yield a negative return and in which the landlord ends up making a loss on letting the property. This will be a reality for a number of landlords. And that’s without including the mid-segment rental regulation from 2024 in the calculations.
What’s the idea behind the Box 3 Tax Plans?
One of the government’s arguments is that box 3 has been so generous for so long that it can now be tightened for investors. Yet this only applies to investors who have ‘profited’ from the generous scheme for many years already. Anyone who has recently started to let a property as an investment hasn’t been able to profit at all and will now be hit doubly hard as recent buyers have of course bought at high prices.
Furthermore, the government continues to think in terms of exploitative landlords who can afford to lose a portion of their return. We know that the vast majority of our landlords are people who own some real estate in order to accrue a pension with it, for example. And what about those people who let their homes to a family member at extremely moderate rents and will now be further penalised for doing so?
What to do
The Box 3 Tax Plans for 2023 are in principle already a reality, although the rates may still be adjusted slightly and the government is talking of potentially moderating the transitional scheme if it has an exceedingly punitive impact.
We certainly recommend that you object to your tax assessment over 2023 as this emits a clear signal that the system is unrealistic. If the government does see sense, it’s possible that only those who’ve objected will receive compensation.
Placing your real estate in a private limited company (BV) might be an option but isn’t always the simplest solution given transfer tax of 10.4%, formation expenses etc.
Is it better to keep your head down after all? After all, that’s how I opened this blog. It’s possible that the government will revise its plans and this is in any case only a temporary transitional scheme. A fairer system should be in place from 2026. So apart from keeping your head down, another option is to keep your hopes up and vote prudently.
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