Gibraltar budget wish list

At the end of June, the second budget of this current Government will be presented. The property sector is a vital part of the economy, not only contributing stamp duty on transactions but providing the space for the private sector to drive the desired GDP growth.

This year I focus on three areas which might be up for debate to assist the property sector.

Empty properties in Gibraltar

There is a real supply problem in the property sector at the moment. My April and May articles explained the current state of the local property market in more detail. Suffice to say that demand for rental properties easily exceeds supply. In the office property market, Chesterton Estate Agency believes there is less than 2,000 sq m currently available, which is below half of that last calculated by Chesterton in January 2012.

With no further large scale developments due to complete in the next year or two, this shortfall will push prices higher and restrict the ability for ‘Gibraltar PLC’ to attract in new companies which bring new jobs and economic activity.

Somewhat paradoxically, Gibraltar has many empty properties, many of which are held privately and these are not confined to the Upper Town (where there is a well-documented plan by Government to return these properties to the marketplace).

I visit many empty properties with owners seeking advice as to how best to finance and / or refurbish their properties. Many property owners choose to do nothing, waiting for another day. However, I believe that it must be in Gibraltar’s interest to reduce both the overall number of empty properties and the length of time that properties remain unoccupied.

Bringing an empty property back into use offers owners considerable potential advantages to the owner and the community. In this market, the owners, if they have access to finance to bring the property back into use, should make a good return if they sell or rent the property. Regardless, the property value will increase.

The community benefits from returning empty properties to use for a number of reasons. Firstly, empty properties are a wasted housing resource and deny homes to households or offices to companies. Secondly, empty properties are an eyesore and damage the aesthetic environment, even having a negative impact on community safety in some respects. Finally, they can, and do, reduce the value of nearby properties.

Properties become vacant for many different reasons. In the majority of cases this is a short term issue, for example, where a property is in probate or in need of renovation before it can be occupied following a change of ownership or, if let, between tenants. Such transactions are a normal function of the housing market. However it is the properties that remain empty for over six months that are the properties I am concerned about especially where they are not being actively marketed or prepared for occupation and are unlikely to be returned to use for some considerable time or without some form of intervention.

Hence I believe that the budget could deliver an incentive to owners to encourage redevelopment and bring back into use these empty properties. The incentive could be in the form of grants, or future rates and tax reliefs. Perhaps it is also time to consider a disincentive for not bringing properties back into use. Harsh? Possibly. But in the UK, where there are some 710,000 empty properties, rules have just changed to allow local councils to end the 50% discount on rates where properties are not occupied to a premium of 50% on top of the full council tax once a property has been empty for two years. The UK is clearly tackling the problem head on.

Gibraltar 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

Firstly, these rates seem to be unnecessarily complicated for no obvious reason. The calculation of duty payable is not an easy task for many a buyer trying to calculate the sum (often in their head) at the time of making an offer. I wonder whether the rates could be simplified with no net gain or loss to revenues?

Secondly, the thresholds at which the rates are applied, creates a false market at each level. For example, a property sold at £200,000 costs a buyer £200,000, whereas a property sold at £201,000 costs a buyer £205,020. Which means no properties are sold just above £200,000 or £350,000, even if that is their market value.

Overall, the duty rates are internationally competitive and as much as the property sector, and buyers, would like to see reductions in duty, I think leaving the rates broadly as they is realistic for all concerned.

However, perhaps we could introduce duty rates and thresholds which when they graduate upwards are easier to calculate and remove false valuations at the thresholds.

Gibraltar Rental income

In Gibraltar, rental income is taxable, whereas investment income is not.

Buying property creates economic activity for the economy (stamp duty, refurbishments, buying furniture), leaving money in a bank does not.

Yet the tax system encourages passive investment over property investment.

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 net yield before mortgage interest of, say, 4.5%, will pay tax either at the company income tax rate if held in a company or at his personal tax rate.

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

Perhaps this is an inadvertent bi-product of the tax system. Across the rest of Europe, governments are trying everything possible to move money out of banks into economy generating ideas. Should the tax system prefer passive investment over property investment?

Whatever decisions are made in the budget, Gibraltar’s economy and property sector remain far healthier than much of the rest of Europe.