Betterment tax (hetel hashbacha) is a levy payable to the local planning authorities by an owner or long-term leaseholder of a property, under Israel’s Planning and Building Law.
If, since the seller originally purchased the apartment, the planning authorities have adopted a new zoning plan allowing greater use of the property or additional building rights, or if the seller submitted a request and was granted additional building rights or other benefits affecting the value of the apartment – the seller may well owe the municipality Betterment Levy, which is payable by the seller at the time of sale.
For example, the local municipality may approve a city building plan, which allows certain residential areas to add a room on the roof of their building. The very ability to add another room improves the building – and, by extension, of the property itself, thus raising its value. Hence, the name “betterment tax/levy.”
The tax is in an amount equal to 50% of the increase in value of the property created by the amendment to the local plan by the planning authorities. That said, in practice, landowners may be able to lower this percentage somewhat, after exercising their right to a counter-appraisal. Many sellers are not aware of the levy until after they have signed sales contracts, by which point it is too late. There are other municipal assessments, such as for new sidewalks, roads, sewers etc., which may have to be paid by the seller in order to carry out the sale.
Betterment levy is not charged for illegal construction, such as building without a permit. However, where the property owner is brought to trial, capital gains tax may be added as part of the legal proceedings.