Property Tax – An untimely and risky measure?

By Daniel Herbert

In a time of economic uncertainty due to our exit from the EU and the everlasting treaty negotiations, when Gibraltar needs stability and growth, Minister Feetham’s new property tax risks destabilising a key sector of our economy. In his budget speech last month, he proposed a new tax purportedly to “provide clarity and certainty regarding the taxation” of wealth being generated by the acquisition and subsequent sale of real estate assets. However, after releasing the draft legislation nearly three weeks after announcing it, it is clear the new measures go far beyond the examples he provided in his budget speech and could do more harm than good. The new tax could undermine investor confidence in Gibraltar’s real estate market, causing a ripple effect that reduces foreign investment across other sectors, and further straining our economy during an already precarious time.

The potential damage is already manifesting itself, with Chestertons confirming in their ‘Bitesize Brief’ that they had lost three transactions in just one week due to the Bill. There may be others that have failed but have not been made public. Potential investors and/or future residents might question whether Gibraltar is the right jurisdiction for them. If implemented, the measures could disrupt an entire industry and hundreds of people's livelihoods for what may be a tax incentive that decreases the Government’s overall tax revenue. 

The proposed tax targets individuals or companies who own three or more properties (excluding exempt properties) when they sell one of those properties. Minister Feetham claimed in his budget speech that they expected the new measure to “generate positive revenue flows,” but those with three or more properties may now hesitate to sell if faced with a hefty tax bill on historical unrealised gains. While the Government may be able to tax these property owners if they choose to sell, owners may now hold their properties for longer to defer tax liabilities. In my view, there will inevitably be a reduction in transactions, which will most likely result in less stamp duty being collected. Government Stamp Duty receipts were £11,487,475.50 in 2022/23, forecasted to be £12,300,000.00 in 2023/24, and estimated to be £11,500,000.00 in 2024/25. This is a significant revenue stream that is now at risk.

To complement this, the Chief Minister announced in his budget speech that the Government would introduce a new “special stamp duty” of 0.5% on off-plan purchases that the seller would pay. This measure assumes the seller profits from the sale of the off-plan property. Is it not counterintuitive to introduce a special stamp duty on off-plan resales, expecting to generate new tax receipts, while also introducing another tax that discourages people from buying or reselling those properties? Will Minister Feetham’s new proposed measure bring in more tax revenue than is lost from the potential tax they expected to raise from the new special stamp duty? Will his new measure exceed the stamp duty lost due to fewer transactions? We shall see if the Government provides financial modelling when the Bill is debated in Parliament.

The proposed property tax not only threatens the real estate sector but also has broader implications for the private sector due to the multiplier effect. When investor confidence in real estate dwindles, the immediate impact is usually a decrease in property transactions, leading to reduced revenue for estate agents, construction companies, furniture and kitchen suppliers, and related businesses. This downturn could ripple outward, affecting local businesses that thrive on construction, residents, and new property owners. The contraction in these sectors could lead to job losses and lower consumer spending, which in turn would reduce overall economic activity. The knock-on effects can strain other industries, resulting in a more widespread economic slowdown. To offset the revenue lost from fewer property transactions, the Government may be forced to increase taxes elsewhere, placing an additional burden on businesses and individuals.

Minister Feetham justified the new tax measure as a tool to reduce the “trading of properties” and to protect local “families buying a home competing against wealthy speculators, which drives up property prices.” However, property prices have risen for several reasons, and it is unfair and inaccurate to blame this solely on people buying and selling properties. In my view, the Government’s decision to allow eligible properties in co-ownership estates to be sold on the open market rather than only to Gibraltarians or three-year residents has impacted the prices of starter home properties more than anything else. The Government built these co-ownership estates using tax-payers funds and helped thousands of young Gibraltarians onto the housing ladder. These houses should continue to be bought by young Gibraltarian families as their starter homes. These young Gibraltarian families and long-term residents, as per the previous generation, should not be made to compete with wealthy speculators or others looking to purchase holiday homes. 

In any case, the Government already has the means to tax people or companies trading in property, as Minister Feetham described, but our tax system relies on self-assessment of income. Where people do not declare their income, the Government has had to embark on “costly enforcement action” to ensure the correct amount is paid. It therefore seems that the real issues Minister Feetham should be solving are enforcement, which could be solved with stronger investigatory and enforcement powers, or higher penalties. 

The new tax measure and its broader consequences do not appear to have been thoroughly considered. Minister Feetham appears to have opted for an easy win by taking the age-old adage of "taxing the rich" to win over potential voters in the impending GSLP leadership race. Although the new measure is being presented as beneficial for locals attempting to buy property, it ultimately serves as a ruse to try and increase overall tax revenues. The stark reality is that the measure appears that it will raise little (if any) public revenue, and those looking to become homeowners will, without additional direct support measures, continue to live with their parents or in small accommodation as the Government currently has little funds to build new government rental stock or additional subsidised 50/50s.

If Minister Feetham truly wanted to help locals become homeowners, or at the very least ensure that every person has a decent standard of living, his government could consider other more direct measures such as:

Revamping the housing allocation scheme to make it means-tested for applicants;

Separating the Government housing list from those wanting to purchase 50/50s;

Building more government rentals;

Introducing a government help-to-buy scheme for existing previously government-funded properties, which would involve the Government providing funds to the purchaser in exchange for a share in previously developed 50/50 estates (such as Harbour Views, Montagu Gardens, Cumberland Terraces, etc.), which would help individuals buy their first home or upgrade to a larger one;

Introducing planning obligations requiring developers to include a percentage (maybe 10%) of affordable homes within a private development or elsewhere as a condition for obtaining planning permission (like in the UK). Developers are profiting from Gibraltar’s land and should contribute back to the community by providing some affordable homes within their developments. 

A decrease in property development because of the proposed tax may lead to fewer properties being constructed. With fewer new developments, the housing market may struggle to meet demand, driving up competition for existing properties. This scarcity may push property prices higher. The lack of new construction could mean fewer opportunities for employment in construction and related industries, further impacting the economy through lost tax revenues. Additionally, as property prices rise, rents are also likely to increase, placing additional financial strain on those who cannot afford to buy. Ultimately, the proposed tax could create a vicious cycle where decreased development leads to higher property prices, further diminishing the accessibility of housing for Gibraltar’s residents.

While I agree that those trading in properties should pay their fair share of tax, the proposed Bill goes beyond this. It is a questionable time to introduce such measures considering the impact they could have on the broader economy. Gibraltar finds itself in a delicate position due to the ongoing treaty negotiations and the uncertainty it brings (whether we get a deal or not). The real estate sector is a pillar of the economy that provides for hundreds of people and generates substantial revenue for the Government (through income tax from workers, import duties on construction goods and furniture, stamp duty, registration fees, etc.). 

Now is not the time to take risks with the economy or undermine investor confidence in Gibraltar. While Minister Feetham has made remarks on social media that the real success of the Bill will be how the public perceives it, the real measure of the Bill’s success will be whether it increases Government tax revenue overall. Only time will tell…

Daniel Herbert is a lawyer who specialises in residential and commercial property matters.