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It’s budget time! – Gibraltar’s annual budget

It’s budget time! – Gibraltar’s annual budget Image

“It’s clearly a budget, it’s got a lot of numbers in it!” An incisive quote from George W Bush.

On or around the end of each tax year, 30th June, the Chief Minister delivers Gibraltar’s annual budget. Each industry sector probably has its own wish list for changes in the tax burden. I actually believe the property sector works well in Gibraltar from a taxation perspective. No capital gains tax, wealth tax or inheritance tax, all such factors encourage property investment. However, there is still a wishlist.

Stamp duty

The rates of duty applicable are as follows:-

(i) Nil % if the property value does not exceed £200,000,

(ii) 2% on the first £250,000 and 5.5% on the balance, where the property value exceeds
£200,000 but does not exceed £350,000, and

(iii) 3% on the first £350,000 and 3.5% on the balance where the property value exceeds
£350,000.

The lower stamp duty limit is increased to £250,000 for first and second time buyers.

This “cliff-edge” approach to the lower stamp duty rate creates a tricky and often false market for vendors with properties valued at £200,000 or just above. A property purchased at £199,999 incurs zero stamp duty, whereas if the property is acquired at £1 more, ie £200,000 then the duty is £4,000. I do not see any logic in this.

At the £200,000 level, sellers are separately identifying and valuing the furniture (moveable items for example carpets and curtains, not items fixed to the property for example kitchens and showers), as they may be sold separately and moveable chattels are not subject to stamp duty. Otherwise a seller with a property properly valued at £201,000 to £215,000 is unlikely to achieve the fair value as buyers seek to avoid the stamp duty and buy at under £200,000.

I read recently in the Daily Telegraph that in the UK, where there are similar “cliff-edge” thresholds, that HMRC had identified a buyer who had purchased a property just below the £500,000 duty threshold (and at a reported £30,000 undervalue) but had paid for the seller’s wedding reception on top of the purchase price to avoid paying the extra 1% duty had he have paid above £500,000 for the property.

I do not believe that duty rates should create imperfections in the property market and I would always advocate incremental rates of duty, not a cliff-edge.

If Chesterton figures are anything to go by, this year I would expect stamp duty receipts by the Government to have increased substantially over last year with both higher volumes of transactions and higher prices – a double whammy. A far greater number of properties are now in the higher bracket (note that the thresholds are not index-linked either). Perhaps this duty bonanza could help pay for the easing in of duty at the £200,000 level.

Rates in the retail sector

The technological advancement in the last five to ten years in the retail world is unprecedented. Consumers can now shop from the comfort of their own homes, from an infinite range of stores and at prices most likely lower than a high street can match. Retail bricks and mortar stores are increasingly acting as a showroom for a consumer’s later online purchase. This is an international phenomena and not just Gibraltar.

Import duty reductions in recent Gibraltar budgets is a local phenomenon however, and has further encouraged a shift to online shopping in Gibraltar. Growth in local parcel post volumes are a testimony to this.

This leaves Main Street shops at a disadvantage over their online competition from overseas as they have to pay local rent and rates whilst an “Amazon” pays nothing to Gibraltar’s economy for the privilege of selling products to its citizens. In fact the opposite. The parcel collection facility has to be funded to facilitate the overseas online retailer selling locally.

In order to protect our vital Main Street for its vital role in the tourism sector (as well as the social hub of Gibraltar) I would advocate further support to the retail sector either by the re-graduation of import duty or a reduction in government rates for certain retail units.

Investment income or rental income

An investor has £500,000 to invest. He walks into a bank and is offered a variety of returns depending on the term of the deposit or the investment product he chooses. His income is tax-free regardless.

The same investor then walks into an estate agency (hopefully a good one!) and is offered a property at £465,000 which he wants to rent out. The investor pays £14,500 stamp duty to government and £20,000 to furnish the property. He rents it for £27,000 per annum and pays service charges and government rates. He pays around 25% on his rental profit in tax.

Which investment is better for Gibraltar’s economy? Passive investment creating minimal economic activity locally, or a property investment generating tax revenue throughout its life plus providing accommodation for a tenant?

So why does the tax system favour the passive investment? I’m biased of course. But economic activity is best.

The ultimate wish

George Washington couldn’t have stated it more succinctly: “We must consult our means rather than our wishes.”

Contributed by Mike Nicholls