Government plans to tax profits on the sale of certain properties could dampen investor interest in Gibraltar and lead to unintended consequences, real estate experts have warned.
They were reacting to a measure announced by Nigel Feetham, the Minister for Justice, Trade and Industry, who said the Government will impose taxation on profit or gains derived from property sales where any person holds three or more properties, other than their primary residence.
Mr Feetham said the aim was to ensure people trading in property paid tax on any gains, adding families buying homes were competing with “wealthy speculators” who drove up prices.
“We do not seek to tax those who have a small number of properties but instead those who effectively have a property trade and are generating substantial wealth from this,” Mr Feetham said.
The measure will be backdated to July 1, 2024.
But the announcement caught real estate agents by surprise, as did the absence of detail as to what is envisaged.
Louis Montegriffo, the chief executive of BMI Group, said the measure needs to be considered carefully, amid fears it might otherwise deter investors.
Mr Montegriffo said while the Government had set out the broad aims of the measure, there was a need for detailed explanations on how it would work and how it would be regulated and monitored.
He told the Chronicle he understood the reason behind the tax, as there is a lot of speculating happening where investors buy properties off plan, hold them for a period, and then sell them on at a profit before construction is finished and, in some cases, before building work has even commenced.
But while the “party is over” is some sectors such as the market for studio flats, where the market has been saturated with developments full of studios sold off plan and then sold again, his concern is that the tax could deter future investors who are often key to funding new developments.
Mr Montegriffo has clients with property portfolios who have invested in Gibraltar for many years and would be caught by the new tax.
“This needs to be looked at,” he said, adding there was a risk that existing investors already committed to Gibraltar could be penalised by a measure akin to a capital gains tax.
“And how about people coming to Gibraltar to invest long term?” he asked.
“It may deter speculation but be careful of the message we are sending to investors.
Mr Montegriffo pointed too to a separate measure announced by the Chief Minister on Monday, namely a 0.5% special stamp duty on off-plan purchases, not including sales on subsidised estates.
He said this could also act as a deterrent for people investing in off plan properties.
Mike Nicholls, from Chestertons, echoed similar concerns about the tax measures in his ‘Bitesize Brief’ newsletter on Thursday.
“A day after the budget [Tuesday], more tax measures were introduced by the Minister of Taxation, Nigel Feetham. Of particular interest to the Bitesize readership will be the allocation of gains made on property sales to an individual’s or company’s annual taxable profit, hence presumably payable at 25% (local resident owned properties), 39% (non-resident owned properties) or 15% (properties held in local company),” he wrote.
“A primary residence is excluded as are property portfolios of two or less (are the first two exempt then the 3rd taxable?).”
“No detail has been published, yet the tax applies from 1st July 2024 so is already a retrospective charge.”
He also noted that there is no definition of “profit”, nor of “property” and asked whether the measures would include commercial properties, car parking, stores and jointly owned properties.
“Hopefully there will be an element of indexation and relief for long term holds as serious investors provide the much-needed properties for open market rentals, to allow for the fluidity of overseas employees required by local employers to reside in Gibraltar,” said his brief.
Indexation is applied to adjust the purchase price of a property or investment to reflect the effect inflation has had on it.
Mr Nicholls warned that any impact on the size of the rental pool would increase rents, which are already high, which may be an unintended consequence.
And he cautioned too of a potential impact on new developments going forward.
“Those investors (the Minister refers to them as ‘wealthy speculators’) who purchase a portfolio of properties at the start of an off-plan project, are essentially providing the finance to enable the development to be built,” he said.
“Gibraltar does not have a mature mezzanine finance industry so dissuading investment at this time may also have other unintended consequences.”
“As ever, the devil is in the detail and we can only hope for some industry consultation to ensure that the legitimate task of raising revenue is undertaken in a well thought through manner.”