words | Lynette Chaudhary, STM Fiscalis Ltd
The demand for Gibraltar rental property continues to increase and the UK’s decision to leave the EU in June 2016 and subsequent uncertainty does not, currently, appear to be affecting this. This high demand and limited supply leads to attractive rental yields, which may be one of the many reasons why owners decide to rent out Gibraltar property. Louis Montegriffo, Managing Director of BMI Group confirms:
“The lettings market in Gibraltar remains buoyant with supply at its lowest point ever and an ever increasing demand from various sectors; not least Gaming, Insurance and private clients relocating to the Rock. High value properties which previously were harder to let, are now very much in demand and we believe that this is testament to the success of our economy and its continued growth despite Brexit.”
Added to this, in July 2016, the Government announced a new budget measure incentivising new Gibraltar property investment and rental. This measure applies to any property constructed in the thirty months from 1 July 2016 and rented for residential purposes. It provides owners with a tax credit equal to the tax payable on the rental profits earned for the first twenty four months, if that period occurs in the first five years after the completion of construction of the property. The tax credit can be offset against the tax payable to extinguish any liability to tax. An encouraging economic measure in uncertain times.
Chargeability to tax
What is the tax position on rental profits earned on a property not qualifying for the above and on above property once its “tax-free” two year period has ended?
Under Gibraltar tax law, rental profits derived from property in Gibraltar, whether owned by a Gibraltar resident or non-resident are chargeable to Income Tax. Therefore, there are Gibraltar tax reporting obligations which owners should be aware of.
Typically, where an owner holds property as an investment, for the medium to long term, whilst the rental profits are liable to Gibraltar Income Tax, there should be no Gibraltar tax due on any gain made on eventual sale, in the absence of Gibraltar Capital Gains Tax.
However, if the owner is resident outside of Gibraltar, the tax position on the rental profits and any gain on sale should also be considered in their country of residency. Often, the rental profits and gain will be taxable there with, potentially, a foreign tax credit available to claim for any Gibraltar tax paid.
Registration as a landlord
All individual owners receiving Gibraltar rental income must register at the Income Tax Office (ITO) by submitting a completed Rental Income Registration Form known as an S4. The ITO also requires a copy of a valid ID or passport and proof of ownership of the rented property. If the property is owned jointly, both owners need to register and report their share of the rental profits on their annual Tax Return.
How are rental profits calculated?
Rental profits are calculated as the rents received less expenses that can be set against those rents for tax purposes. Where more than one property is rented, all rental income and expenditure is added together to treat them as one when working out the profit or loss.
Deductions for expenses are only allowed if they are wholly and exclusively expended for the purpose of the property rental and are revenue rather than capital expenses. Capital expenditure generally relates to buying, improving or selling the property and is not normally allowable, although expenditure incurred on painting, decorating, repairing or enhancing the appearance of property can be an allowable expense, if certified by the Town Planner.
Common types of revenue expenses paid by the owner that can generally be deducted are:
- rates and service charges
- general maintenance and repairs to the property
- insurance – owners’ policies for buildings and contents
- interest on a mortgage to buy the property
- letting agent and management fees.
Equipment, fittings and furniture used inside a residential property do qualify for capital allowances in Gibraltar. This can provide a significant deduction against income. The assets which may be eligible for capital allowances include all the furniture used in the property as well as rugs and white goods. Generally, this means that 100% of the cost of such purchases can be deducted in the year of purchase, up to £30,000 per year, and for any excess a 20% annual writing down allowance.
Income losses and profits
After deducting allowable expenses, if a rental profit arises, this is generally taxed (after any available personal allowances/deductions) at the owner’s marginal Income Tax rate (i.e. up to 28% under Gross Income Based System or up to 39% under Allowance Based System – 2016/17 rates).
If the allowable expenses are more than the rental income, a rental loss arises and this can be carried forward to set against any future rental profits, saving tax in future years.
Tax Return and payment
The responsibility is on taxpayers to submit annual Tax Returns of their assessable income.
For owners, they are required to include details of their rental profit/loss on their annual Tax Return and provide an Income and Expenditure Account.
Apart from in the first year of rental of the property, a payment on account system operates for owners, whereby 50% of the tax is due by 31 January and the other 50% by 30 June, based on the rental profits reported for the previous tax year.
The Gibraltar tax year runs from 1 July to 30 June. For income in the year to 30 June 2016, the Tax Return is due to be filed, with any remaining tax due by 30 November 2016.
If the property is owned by a company, the rental profits will be taxable at the company tax rate of 10%.
Payments on account may still apply but with different payment dates (28 February and 30 September).
Tax return filing for companies is nine months from financial year end (with any remaining tax due).
The tax position on extraction of profits from the company (e.g. dividend) should also be considered.
If any profits have been undeclared and held overseas, a Gibraltar tax amnesty is currently in force until 4 January 2017. This provides the opportunity to declare the income and pay 7.5% of the total amount remitted to Gibraltar. After the amnesty, a penalty charge of 100% will be imposed.
For UK residents, who may also be liable to UK Income Tax on any Gibraltar rental profits, HMRC, through its Let Property Campaign, are also offering owners who owe tax on worldwide residential property rental the opportunity to get up to date with their tax affairs in a straightforward way on the best possible UK terms available.
Lynette Chaudhary, International Tax & Research Director, STM Fiscalis Ltd.