A new form of property tax announced in the Maltese budget will lead to an increase in property prices, disadvantage foreign buyers and generally fail to achieve its objective of stabilising the local housing market, island developers and estate agents warned in a report by the Business Times of Malta

Prime Minister and Minister of Finance Dr Lawrence Gonzi announced in the recent budget speech that the 35% capital gains tax on profits from the sale of property is being replaced with a 12% withholding tax on the entire proceeds from a property sale.

The new tax does not affect those selling their primary residence, who were exempt from capital gains tax.

The government's rationale for switching to a withholding tax was to cut down on under-declarations of selling price and to boost the housing supply by encouraging those who have held on to property for long periods to sell.

"We expect more honest declarations: Under capital gains you paid 35 per cent on each lira declared, now you would only pay 12 per cent, so there is less incentive to cheat," Parliamentary Secretary Tonio Fenech told the Times.

"We also believe that there are a number of people who were hoarding property because the value would have gone up considerably over the years. They would have been reluctant to sell because they would have had to pay so much under the capital gains regime," he added.

However, one estate agent told the Times that the new tax will fail in both these objectives because the value of a property will have to appreciate markedly for a sale to become worthwhile, and sellers will still have an incective to under-declare final selling prices.

"People will now have to wait longer to sell a property, until the price goes up enough to make it worth their while; they will put up the price to cover the tax; or they will underdeclare the selling price in which case the government is back to square one," argued Joe Lupi, the managing director of Frank Salt Real Estate.

Mr Lupi estimated that the new tax will only benefit those who have held properties for between 10 and 15 years, and will disadvantage those who have recently bought second homes, especially foreign investors.

"It will definitely affect the foreign market negatively," he warned.

"Foreigners either buy as an investment or as a holiday home. The advantage of the former was capital appreciation, which runs at about 8-10 per cent every year as rental income is quite low. They would now wait three to four years for it to be worthwhile," Mr Lupi added.