At the end of this month, the Chief Minister of Gibraltar, Fabian Picardo, will present his first budget. I bet he is inundated with ideas from different interest groups. From the inward investment and property perspective, I set out below four items from my own wish list for the 2012 Gibraltar budget.

Old buildings

There are too many old buildings, predominantly around town (but not exclusively so), that are virtually inhabitable and / or empty. Housing in Gibraltar is expensive and there is not enough of it. In the private rented sector, many employees spend some 50% of their net income on rent. This is not a problem exclusive to Gibraltar, most major cities have the same issue.

There are two ways to tackle the problem. Encourage restoration by grants or tax incentives, or, penalise the lack of restoration by imposing higher rates or taxes on empty properties. There is no easy solution, especially if government funding is tight.

In Gibraltar, there exists the “Income Tax (Deduction of approved expenditure on premises in tax deductible property zone) Rules 2010”, commonly known as “Façade Relief”. This rule allows landlords or tenants (with landlord consent) of property in eligible areas to offset the cost of works on improving the frontage of a building against future assessable income. Hence full tax relief, which in itself, is quite generous.

In theory, this should be helping the situation. Perhaps too few landlords are aware of it. If it were extended to the restoration of the entire building, for example to include costs associated with the restoration to convert inhabitable buildings back into use, perhaps more landlords would invest in their own properties? This would need to be policed quite closely.

This topic is a political minefield, but without another push, buildings will continue to be left in disrepair.

Stamp duty

Stamp duty thresholds are currently as follows:

Purchase price Rate

To £200,000 Nil

From £200,001 to £350,000 2% on the first £250,000 and 5.5% on the balance

Over £350,000 3% on the first £350,000 and 3.5% on the balance

My main issue with this structure is that the lower threshold creates a false market around the £200,000 price point where the duty increases. For example, a property sold at £200,000 costs a buyer £200,000, whereas a property sold at £210,000 costs a buyer £214,200. What chance of a vendor achieving £210,000? Very little, the buyer will knock him down to £200,000 or be forced to reduce to allow for the buyer’s stamp duty.

We would all like lower stamp duty, however, in reality the rates are unlikely to reduce. What would be good is if the duty above £200,000 was only on the sum above £200,000, not the whole amount. That would give vendors with properties really worth £205,000 to £220,000 or so, a realistic chance of achieving their true value.

And perhaps the lower limit could be increased to allow those struggling to get onto the property ladder some breathing space. Every little helps in these cash constrained times.

Rental income

When a property is let out to tenants, tax is due on the rental profits, ie rent less any mortgage interest and property owning costs for example service charges, rates etc. So an investor who buys a property to achieve a 5.5% gross yield and perhaps 3% or 4% net yield after mortgage interest, will pay tax either at the company income tax rate if held in a company or at his personal tax rate.

Should this investor choose not to buy a property but instead leave the money in a bank, no tax is due on the interest income.

So the tax system dissuades property investment, which creates revenue to the government and ensures a good rental stock is available for tenants, and encourages bank investment which takes money out of the economy serving very little purpose other than maintaining capital ratios for the banks.

Perhaps this is an inadvertent bi-product of the tax system? Perhaps rental profits could be taxed the same way as interest income which would encourage property purchases (hence stamp duty income to the government, and money in circulation, eg buying furniture and such like) and may even lead to downward pressure on rents?

Employment

We all want to see greater employment levels, even in Gibraltar where the unemployment rate is far less than in the major European economies. It’s good for any economy to have its people earning, spending, and paying local taxes, especially when the money is spent locally, all of which adds further to the economic activity, so a good ripple effect.

In this tough economic climate, businesses will think twice, or three times, or in many cases, not at all, about taking on additional staff. It would be most welcome if there were incentives for new or even existing companies to take on more staff, across the wage spectrum, not just trainees. Many businesses may have the choice of recruiting someone to undertake a project, or hiring in a consultant, or giving the work to a company outside of Gibraltar. Incentivising the first option and achieving a net increase in the number of employees, perhaps by grants or one year tax exemptions on new employment, would be a welcome win win for companies and local staff.

Conclusion

The open property market is in relatively good health. Talk of new offices and hotels carries on whilst developers seek funding solutions. It is difficult for the government to change the banking sector’s reluctance to fund large scale development. Perhaps one or two of the above ideas may come to fruition and maintain our relatively healthy economy and property market. We’ll know in just a few weeks.