Should stamp duty on property transactions in Gibraltar be increased to help foot the bill of this pandemic?

The answer is a resounding no and here I explain why, together with the property taxes that could attract new revenue.

Stamp duty

Stamp duty is a clunky and unfair tax on property transactions.  It peaks at 3.5% overall in Gibraltar albeit there is a marginal rate of 5.5% of expenditure between £250,000 and £350,000.  

This economic pause has magnified how fragile the economy is when we stop spending.  A pound spent funds someone else’s wages so they spend too and each time someone earns some money the government will take a slice in either income taxes or expenditure taxes (duty).  Keep that pound spinning around in Gibraltar and the economy improves.    

The property market has one of the largest economic multiplier effects of any industry in Gibraltar.  One property purchase positively impacts, in financial terms, the tax payer (stamp duty and probably import duty), banks (mortgages), lawyers, surveyors (including Energy Performance Certificate providers), estate agents, home furnishing retailers, DIY shops and refurbishment contractors.  Hence the economy benefits from property transactions because they feed so many related sectors.

Who pays stamp duty?

Stamp duty is charged on those seeking to move house. Families necessarily expanding or downsizing.  New employees moving to Gibraltar or out of the rented sector and into the owner occupation market.  Each activity positively impacts the economy and should be encouraged yet stamp duty discourages this lifestyle choice.  Companies looking to relocate to Gibraltar bringing new economic activity and jobs will benchmark different locations and stamp duty will be one of the negatives, as a cost of moving.  Why should this sector of the economy, ie property movers, the minority, bear the burden of the coronavirus deficit?  It is unequal and not means tested to any degree.  Any new burden should fall on the many in a means tested manner not the few who are undertaking a positive lifestyle activity. 

Property investors

How about property investors who are not moving but investing?  Perhaps they should be targeted as most people don’t feel sorry for landlords.  Increase duty on second homes or property investments.  To properly consider this it is important to note the value to Gibraltar of the large number of properties held by landlords to provide a fluid rental market. 

At the very outset of a property development in Gibraltar, a developer must sell a certain number of properties before any bank will be willing to lend construction finance.  Without investors willing to essentially provide the mezzanine finance, property development is not viable.  In Gibraltar we do not have the swathe of lending institutions willing to step in. Just one bank, NatWest, provides construction finance above £10m given that Jyske has left and the replacement bank has yet to be tested.  In the UK and larger economies there are insurance companies, pension funds and private equity groups willing to lend as well as banks. There is no such availability in Gibraltar.  Investors, ie future landlords, provide the necessary finance or the development doesn’t get built, leading to a demand supply imbalance and rents increasing to unaffordable levels, if they are not so already for many.

The importance of a fluid rental market in Gibraltar cannot be understated.  Whenever a new company or new employees are attracted to Gibraltar, and a huge effort is made by government agencies to encourage this, the starting point tends to be a rental property before that new person is willing to take a long term decision and buy a property.  There needs to be a wide choice of availability at different price points and property types otherwise Gibraltar is not going to be able to attract this inward investment.  Gibraltar has a regularly changing workforce within its gaming and financials sectors and a fluid rental market enables this, just as a lack of available rental properties would restrict this, with adverse long term consequences. 

Discourage property investors and there is a longer term structural economic price to pay.

Other property taxes

So how can the property market help contribute more to the public purse if purchasers should not pay more than now?
Whilst property purchasers pay stamp duty in Gibraltar, property owners pay government rates and income tax (if a landlord renting).  Property sellers do not pay any tax arising from the sale.

Government rates

Government rates are comparatively very low on residential properties and have no progressive banding as they do in the UK.  Edging up rates in a progressive manner shares the burden in relatively equal measures and can easily be applied.  Not popular, but do’able. 

Income tax on landlords

Local landlords pay income tax on their net rental income at their marginal rate of tax (max 25% currently) whilst non-resident landlords pay tax at 17% on the first £16,000 and 39% thereafter, one of the highest rates of tax in Gibraltar (if not the highest).  There is little scope to penalise this further if Gibraltar wants to attract foreign investors.

Sales tax

There is no sales or capital gains tax in Gibraltar, a feature of the low tax system which is used to attract inward investment.  In theory, a capital gains tax could be introduced at a low enough rate not to deter investors but to enable a new revenue stream for government albeit this would impair the sales mantra of “no wealth taxes, no capital gains tax, no inheritance tax ………” etc.  However, any new tax could exempt owner occupied property and local residents.  Virtually all non-resident investors in Gibraltar property pay capital gains tax in their own country of residence and these countries would allow a deduction for a similar tax charged in Gibraltar, hence such a tax could have no impact on the investor at all, it just means Gibraltar taking a slice of what the other country would take (as long as the Gibraltar rate was below the rate of the country of residence of the investor).  Introducing a capital gains tax in this limited way could create a new income stream without upsetting the market.  

Conclusions

Encouraging a strong property market with a return to the number of transactions experienced just a few months ago will best assist the economy get back on its feet.  I believe the property market is strong enough to survive this pandemic without the need for a stamp duty holiday (as the Royal Institute of Chartered Surveyors is recommending in the UK), however, discouraging property transactions by increasing the rate would have a short, medium and long term negative impact on the Gibraltar economy.