Elliott Phillips and Paul Grant discuss Gibraltar’s new draft legislation on property in Taxation

A recent draft legislation published by the Government of Gibraltar seeking to introduce a tax on profits derived from residential property sales in circumstances where an owner holds three or more properties has sparked considerable discussion and given rise to polarised views amongst politicians, investors, property agents and lawyers on the Rock in recent months.

The measure was first announced by Nigel Feetham, the Minister for Justice, Trade and Industry, during the Budget debate in the Gibraltar Parliament in early July.  Whilst praised by many as a long overdue tax on those involved in property trading, others warn that it may deter inward investment to Gibraltar at a time of political and financial uncertainty for the Rock.

What is the scope of the proposed legislation?

The Income Tax (Amendment No. 2) Bill 2024 applies as from 1 August 2024. It provides that income derived from gains made on property sales - where a person or entity owns three or more taxable properties, including off-plan properties – will be subject to income tax in Gibraltar. It does not apply, however, to a person’s primary residence or other exempted property. The measure specifically applies to:

• residents and non-residents of Gibraltar;
• properties owned by individuals or entities whether directly or indirectly (i.e., through a company holding the property); and
• properties owned by an individual wholly or in part.

The proposed tax, which is intended to bite only upon disposal of a property, covers properties held through corporate or trust structures. It will also apply to a sale of shares in companies whose principal activity consists of ownership, holding or management of residential property in Gibraltar. The new legislation provides that the property interests of “connected persons” may also be taken into account in determining whether the law applies.

The Bill has been criticised in some quarters for an alleged lack of clarity. The measure will soon be debated in Parliament and the Gibraltar Government is expected to issue guidance on the scope and application of the proposed legislation in the coming months.

Which ‘taxable’ properties fall within the scope of the legislation?

These include any residential property, including off-plan residential property. They do not include, among other things:

• a property used exclusively as the primary residence of its beneficial owner;
• properties used for commercial purposes;
• a property that is both residential and commercial but is predominantly for commercial use;
• properties which are unfit for habitation, or in need of substantial repair, where the purpose of the purchase is for development for resale or letting; and
• a property owned by the estate of a deceased person.

The legislation does in some aspects offer reprieve for those falling within its scope. It is envisaged, for example, that costs incurred wholly and exclusively for generating the income, such as purchase costs and improvements, may be deducted from the sales proceeds to determine the taxable income.

What are the applicable tax rates?

Current rates of taxation on the Rock prescribe that Gibraltar-resident individuals can expect to pay up to 25% on taxable income. For companies, the prescribed rate is generally 15% although some exemptions and nuances apply. Non-resident individuals can expect to pay up to 39% on taxable income and will inevitably be the hardest hit should the Bill pass into law.

Cool reaction from some market players

The real estate sector was amongst the first to highlight the perils of dampening investor interest in Gibraltar and quickly warned of the potential for various unintended consequences. Chief amongst its concerns is the possible impact upon inward investment, which has long considered a vital contributor to Gibraltar’s buoyant and burgeoning property market. Over the past two decades, the property market has been a cornerstone of the local economy and a lightning rod for investors, foreign and local, who have been crucial to financing new developments in Gibraltar.

Some are fearful that existing investors may now find themselves being punished by a measure labelled by some as capital gains tax “through the back door”, whilst others will be deterred from investing altogether and may choose to target other jurisdictions.

Concerns have also been raised by corporate service providers, some of whom feel blindsided by the contents of the Bill. Clients with substantial property portfolios, believed in some cases to be upwards of 20 properties, may well feel acutely targeted.

Bullish response from the Gibraltar Government

The Bill to introduce the measure has yet to be presented to Parliament and will be debated after the summer recess. Mr. Feetham has, however, been clear about his intention to press ahead with it come what may. The policy has been praised for its apparent focus on tackling abuses and opportunism in the market, observations on which he says he intends to share with Parliament once the debate begins in earnest.

Taking to his social media, Mr. Feetham firmly defended the measure, stating that “[w]hile a few wealthy property speculators - those who buy large numbers of properties off-plan from developers, depriving local buyers and driving up prices - might not like it, we believe this is the right step forward.”

Undeterred by the detractors, Mr. Feetham suggested that such individuals appeared to think they “shouldn’t pay tax in Gibraltar, unlike everyone else”. “They will” – he asserted – “pay tax under this Bill”. The Minister also expressed his confidence that the majority of people affect by the intended legislation would understand the Gibraltar Government’s aims and objectives. Time will tell whether that confidence is well-placed or not.

Political backlash

The Bill is expected to be hotly debated in Parliament and will be followed with keen interest by the public.

The Opposition party claims the Bill raises more questions than it answers as to its application. The GSD has slammed the Gibraltar Government as being “desperate for cash” following what it describes as the gross overspending and lack of financial prudence by the current administration since taking office in December 2011.

Shadow Minister for Public Finance and Investment, Roy Clinton MP, has aired particular concern as to the timing of the Bill.  He says this is a crucial time in Gibraltar’s journey as it continues to negotiate its own, Gibraltar-specific Brexit deal with the European Union. It is not the time for uncertainty and says “…the Minister’s enthusiasm to randomly revamp our long-established tax laws, without consultation, is unnerving some.” The Opposition’s view is that the Bill is too widely drafted and fails to properly home in on the few wealthy property speculators who have typically purchased large numbers of properties off-plan from developers.

Comment

The Gibraltar Government said the purpose of the measure was to provide “clarity and certainty” in taxation of property sales that generated income for many people but often regarded as being outside the tax regime. Minister Feetham said the intention is to target wealthy investors who treat the property market like “a stock market”. The practical effect of the draft legislation is to draw a clear distinction between individuals and entities trading in the property market, and those who are not.

The measure has, for the reasons explained above, been welcomed in some quarters particularly by those impacted and aggrieved by property speculation and the effect this has had on property prices in a jurisdiction spanning only six square kilometres where available land is extremely limited. The practice of ‘flipping’ (i.e., the buying and selling of off-plan properties prior to completion of properties) has come in for particular criticism by individuals who feel they have been squeezed out of the domestic property market and are disgruntled at the difficulties they face getting on the property ladder.

There is some worry however as to the potential implications of the tax regime both for the Gibraltar property market and investment in jurisdiction. At first blush, such concern does not appear misplaced. Property owners may be more reluctant to sell their properties possibly leading to a general slowdown both in the number of properties available for purchase and the number of property transactions. The reduced incentive for investors to buy and sell properties could also slow down new development projects. The new tax may disincentivize investment in the jurisdiction by, say, companies and family offices looking to invest offshore. Additionally, owners of a property portfolio in Gibraltar may consider that they are being unfairly penalized.

Wider political and socio-economic considerations

Whilst Gibraltar has, like most jurisdictions of its size, been susceptible to economic and political turbulence, it enjoys the benefit a longstanding relationship with the City of London. It has significantly evolved its business model over the last 25 not least by attracting major players in the online gaming industry and latterly, by pitching for a dominant position in the crypto space. It has enjoyed the support of successive business-friendly governments and a “right touch” financial services regulator.

Gibraltar’s competitive advantage is linked to its geographical location in Europe and direct transport links to London. Gibraltar’s future will now depend in large part upon the outcome of the EU’s negotiation with the United Kingdom over Gibraltar’s relationship with the bloc. Gibraltar seeks a free-flowing border with Spain and whilst not existential for the jurisdiction, a hard border in a non-negotiated scenario will bring about serious challenges for the Rock, its people and the financial services industry.

The new property tax measure has not yet been fully tested in the market but seems to have landed well with some wealth creators and investors on the Rock who, on balance, may come to accept the measure as a necessary element of fine-tuning public finances in a post-Brexit and post-pandemic world.  The Gibraltar Government will certainly hope the measure will bring about much-welcomed additional revenues. The impact that will have on the confidence that investors have shown in the Rock over the last few decades will inevitably be tested. All we can do is watch this space.