Offshore companies owning UK residential property need to take urgent action

There are many companies who acquired UK property many years ago so their base value for CGT purposes will be very low. On resale of the property those companies are going to face a very heavy tax bill.

Additionally, companies which own a property worth more than £2 million will now be subject to an annual tax which is being referred teas "Mansion Tax".The amount will vary according to value but will be a minimum of £15,000 and a maximum of £140,000.

These charges are going to greatly impact on the investment value of such properties. Both charges can be avoided by transferring the property from the company to individual owners but, particularly for older buyers or those in poor health, that will not be attractive as it will mean that the property is subject to UK Inheritance Tax(IHT) at 40% of the total value if anything happens to the owner. Obviously it won't concern the owner themselves as the charge will only be triggered when they are past caring but many will be concerned to try and preserve wealth for the benefit of their family and heirs. For that reason, individual ownership will only seem interesting if the ultimate owners are young and/or intending to sell the property sooner rather than later. Those owners are likely to be in the minority. Insurance is likely to be an alternative way of covering the IHT but is likely to be expensive especially for older owners.

HMRC did announce, scene exemptions from the new charges. More detail of those exemptions have now emerged so the planning opportunities have now become clearer.

The first exemption announced was that professional trustees holding residential property would not be subject to the new 15% rate of Stamp Duty Land Tax (SDLT) that was introduced in April this year. They will also be exempt from the Mansion Tax but there is no general exemption from the new CGT charge which previously did not apply to non UK residents. Exemption from CGT can be obtained if the trustees and a beneficiary occupying the property both claimed Principal Private Residency relief. This would normally apply where the property is occupied by any beneficiary or any number of different beneficiaries of the trust. CGT might also be avoided by 'selling' the property by changing the beneficiaries of the trust or if the trustee was private trust company by changing the ownership of the trustee or by both In fact there appear to be so many potential ways to avoid CGT and so many difficulties in collection that the latest rumour is that HMRC may decide not to introduce this new extension. At this stage it would be unwise to assume that CGT will not apply.

Discretionary trusts are subject to a ten yearly charge which could be as much as 6% of the capital value of the property. This is an attempt by HMRC to claw back some of the 40% IHT which is lost if UK property is held within trust The way the ten year anniversary charge is calculated is complicated so 6% is certainly the maximum but it will generally work out to be between 3% and 6% depending on value and other circumstances. Luckily this charge is only payable on the equity in the property If loans are used to purchase the property, the tax is payable only on the difference between the capital value and the loan amounts. For this reason it seems as though a two trust structure may give the best of all worlds.

One trust set up by non-UK domiciled person, can receive the capital amount needed to purchase the property. That amount is then loaned to another trust which actually buys the property. The loan amount is then deducted from the value of the property for the purposes of calculating the 10 year tax. The loan could be sufficiently large to reduce the tax tea nominal or zero amount.

The above does not work for those who are still domiciled in the UK because the transfer into trust would trigger the lifetime IHT charge of 20% For UK domiciled persons it is better to use a Qualifying Non UK Registered Pension Scheme (QNUPS). A QNUPS is a pension trust that enjoys special UK IHT treatment .The pension trustees (typically corporate trustees) are exempt from the new 15% SDLT charge and from the Mansion Tax. A QNUPS is not subject to the ten year anniversary charge. The terms and conditions necessary for the trust to qualify as a QNUPS do mean that access to the capital is somewhat restricted. The property can be sold and the money can be re-invested in another property or anything else allowed for under the pension rules but the pension holder would only able to take the money out of the QNUPS according to the rules of the scheme. Those rules normally allow the pensioner to take a lump sum out on retirement and then the rest in drawdown. That restriction may not suit everybody so the trust structure wit be preferable for non doms.

Happily, a gift by a non UK company to either a trust or a QNUPS can be made free of SDLT as long as there is no mortgage in place on the property.

If there is a mortgage then SDLT is payable on the mortgage amount so the transfer could prove expensive to do now but will result in large savings in the future.

Trusts owning residential property are subject to higher rates of tax on rental income. They pay up to 50%. To reduce the tax on income the income rights can be vested in an offshore company wholly owned by the trust when the property is acquired. The tax rate is then reduced to 20%.

Anybody who owns UK property worth £2 million or which may become worth £2 million in the future should take action now. There is a window of opportunity to rebase the capital cost as long as this is done before April next year.

Ask for a revaluation of your property to save taxes in 2012

Does your property have a tax value (as seen on the IMI property tax bills) of €1,000,000 or more? The Portuguese tax department will be issuing additional stamp duty demands in respect of all properties where the tax value on the 31st October 2012 was 1 million euros or over.

It is understood that these tax demands will be issued by the tax department by the 30th November 2012 for settlement by the 20th December 2012. This new additional tax will be 0.5% of the tax value which means that for a property with a tax value of 1 million euros the bill will be €5,000. A nice Christmas present!

 

Next year properties whose value remains in the plus 1 million euro bracket, will continue to be charged under this new tax and an additional stamp duty bill at the tax rate of 1%, will be issued along with the normal IMI bills in April & September. This means for example that a property in Vilamoura will be paying €4,000 IMI and €10,000 additional IMT tax for 2012.

 

It may be possible to avoid this!

 

By asking the tax department for a revaluation of the property tax value.

Sovereign – Consultoria Lda in Lagoa, Algarve have successfully submitted requests to the local tax departments to reduce the tax values of their clients’ properties thereby saving many of them the additional stamp duty.

 

Even properties with lower tax values can have these updated downwards to save on the IMI property tax bills next year. If your property was revalued under the new CIMI system between 2004 and 2009 and there have not been any alterations to the property since that revaluation, it may be worth asking for a new assessment from the tax department. Because the base value for buildings established annually by the government has decreased and the coefficient for the aging of the property has increased most valuations are expected to be lower. To take effect next year, the assessment must be completed during 2012.

 

Sovereign are happy to offer this service to anyone, even if they are

not existing clients so contact them now.

 

Sovereign - Consultoria Lda
Parque Empresarial Algarve
8400-431 Lagoa
Algarve

T: +351 282 340480 F
F: +351 282 342259
E: icosta@SovereignGroup.com
W: www.SovereignGroup.com

 

If your tax value reduces below €1,000,000 this year as a result of our submission, then you will not be charged the extra tax next year!

 

As in the case of all taxes, if the demand is not paid on time it will incur interest and penalty payments, and can lead to a charge being placed on the property for debt recovery.

Companies owning UK residential property need to take urgent action

Earlier this year the UK Government announced far-reaching proposals to change the way that non UK companies which owned UK residential property would be taxed. Previously these companies, like non UK resident individuals, had not been liable to pay Capital Gains Tax (CGT). Under the new proposals this would change and those companies would now be subject to CGT, broadly calculated on the difference between the acquisition value and the disposal value. There are many companies who acquired UK property many years ago so their base value for CGT purposes will be very low. On resale of the property those companies are going to face a very heavy tax bill.

Additionally, companies which own a property worth more than £2 million will now be subject to an annual tax which is being referred to as “Mansion Tax”. The amount will vary according to value but will be a minimum of £15,000 and a maximum of £140,000.

These charges are going to greatly impact on the investment value of such properties. Both charges can be avoided by transferring the property from the company to individual owners but, particularly for older buyers or those in poor health, that will not be attractive as it will mean that the property is subject to UK Inheritance Tax (IHT) at 40% of the total value if anything happens to the owner. Obviously it won’t concern the owner themselves as the charge will only be triggered when they are past caring but many will be concerned to try and preserve wealth for the benefit of their family and heirs. For that reason, individual ownership will only seem interesting if the ultimate owners are young and/or intending to sell the property sooner rather than later. Those owners are likely to be in the minority. Insurance is likely to be an alternative way of covering the IHT but is likely to be expensive especially for older owners. HMRC did announce some exemptions from the new charges. More detail of those exemptions have now emerged so the planning opportunities have now become clearer.

The first exemption announced was that professional trustees holding residential property would not be subject to the new 15% rate of Stamp Duty Land Tax (SDLT) that was introduced in April this year. They will also be exempt from the Mansion Tax but there is no general exemption from the new CGT charge which previously did not apply to non UK residents. Exemption from CGT can be obtained if the trustees and a beneficiary occupying the property both claimed Principal Private Residency relief. This would normally apply where the property is occupied by any beneficiary or any number of different beneficiaries of the trust. CGT might also be avoided by “selling” the property by changing the beneficiaries of the trust or if the trustee was a private trust company by changing the ownership of the trustee or by both. In fact there appear to be so many potential ways to avoid CGT and so many difficulties in collection that the latest rumour is that HMRC may decide not to introduce this new extension. At this stage it would be unwise to assume that CGT will not apply.

Discretionary trusts are subject to a ten yearly charge which could be as much as 6% of the capital value of the property. This is an attempt by HMRC to claw back some of the 40% IHT which is lost if UK property is held within trust. The way the ten year anniversary charge is calculated is complicated so 6% is certainly the maximum but it will generally work out to be between 3% and 6% depending on value and other circumstances. Luckily this charge is only payable on the equity in the property. If loans are used to purchase the property, the tax is payable only on the difference between the capital value and the loan amounts. For this reason it seems as though a two trust structure may give the best of all worlds. One trust, set up by a non-UK domiciled person, can receive the capital amount needed to purchase the property. That amount is then loaned to another trust which actually buys the property. The loan amount is then deducted from the value of the property for the purposes of calculating the 10 year tax. The loan could be sufficiently large to reduce the tax to a nominal or zero amount.

The above does not work for those who are still domiciled in the UK because the transfer into trust would trigger the lifetime IHT charge of 20%. For UK domiciled persons it is better to use a Qualifying Non UK Registered Pension Scheme (QNUPS). A QNUPS is a pension trust that enjoys special UK IHT treatment. The pension trustees (typically corporate trustees) are exempt from the new 15% SDLT charge and from the Mansion Tax. A QNUPS is not subject to the ten year anniversary charge. The terms and conditions necessary for the trust to qualify as a QNUPS do mean that access to the capital is somewhat restricted. The property can be sold and the money can be re-invested in another property or anything else allowed for under the pension rules but the pension holder would only be able to take the money out of the QNUPS according to the rules of the scheme. Those rules normally allow the pensioner to take a lump sum out on retirement and then the rest in drawdown. That restriction may not suit everybody so the trust structure will be preferable for non doms. Happily, a gift by a non UK company to either a trust or a QNUPS can be made free of SDLT as long as there is no mortgage in place on the property. If there is a mortgage then SDLT is payable on the mortgage amount so the transfer could prove expensive to do now but will result in large savings in the future.

Trusts owning residential property are subject to higher rates of tax on rental income. They pay up to 50%. To reduce the tax on income the income rights can be vested in an offshore company wholly owned by the trust when the property is acquired. The tax rate is then reduced to 20%.

Anybody who owns UK property worth £2 million or which may become worth £2 million in the future should take action now. There is a window of opportunity to rebase the capital cost as long as this is done before April next year.

Mrs Rock in the Smoke

Mrs Rock couldn’t believe her good fortune. She had never won anything, well apart from that school prize but it was so long ago now she couldn’t even remember what she had done to win it. But here was the proof in her hand. A gold embossed invitation addressed to Mrs. Dollars Rock, Gibraltar, OXON. It should have been “Dolores” of course, but “dollars” had a nice ring to it, and whilst she didn’t understand the OXON postcode, this didn’t concern her. After all, her bank was inviting her to an all-expenses-paid financial seminar at a swanky hotel in London in late November. A great opportunity for a pre-Christmas London trip, she thought.

Anyway it looked too good to miss. A whole day listening to world-class experts at an hotel near Hyde Park with lunch thrown in. “Wine extra”, it said, but as she left that mainly to the more bibulous Mr Rock, this didn’t put her off. Another reason she was keen to visit the UK was that Dolores wanted to experience the “Olympic bounce” she had heard mentioned. She didn’t know exactly what that meant but she had seen that nice David Cameron talking about it some days before and it seemed to be a good thing. Her eldest son had suggested it might in fact be some kind of trampoline, although he had more than just a twinkle in his eye when he said it. He suggested that she might enquire at Hamleys if she had the time but she knew he was being silly. He was always like that when the levanter blew.

Being interested in finance, she was also keen to find out more about this double dip recession thingy. What on earth was that then? Had it gone away now? She hoped the seminar would answer her questions. The only problem was that she had to get to London first. Time for some negotiating, she surmised.

And so it was that after agreeing to have Mr Rock’s friends around more often, and once again being landed with Christmas dinner for 18 – which actually she rather enjoyed – Dolores Rock was booked on to a flight to London to visit “her financial advisers”, as she told her rather sceptical family.
Getting there nearly ruined her. She hadn’t been to London since 1983. Now she was going there alone. She was shocked when asked to pay for her coffee on the plane. “And at those prices”, she retorted, “you can keep your festive open sandwich on ciabatta – whatever one of those might be”.
After disembarking, the fun began as soon as she tried to walk up the “down” escalator. “Follow the signs for the train station Mother”, No 2 son had helpfully remarked. “It’s simple. You can’t go wrong”. He must know what he was doing, Dolores mused. After all, he’s always travelling with his best friend, Sheridan. What a polite young man – and always keen to help with the cooking. Her husband didn’t like Sheridan but then he wasn’t friendly to anyone. Dolores thought it odd perhaps that Sheridan and her son went on all those holidays to that Greek island – how did they pronounce it now? “Mike-o-nose”. And what about their trips to Sitges? Wasn’t that was just an artsy town near Barcelona? Ah well the youth of today.

It wasn’t long before she was cursing them both as she trudged through Gatwick’s north terminal. Then the passport queue. Someone had told her about “Iris” who apparently could somehow save people queuing but she couldn’t find anyone called Iris. Just a security officer with an unpronounceable name. She tried saying it out loud but instead amused herself that she might as well be back in Gibraltar where interesting first names are de rigeur.

After what seemed an eternity, as well as a ride on a funny train without a driver, she dragged herself to the ticket machine next to a hand written notice that shouted “Train’s for London”. She looked at the word “train’s” and knew it looked odd but she ignored it. Single to Victoria she thought. Easier said than done but eventually she stepped on to the platform, precious ticket in hand.
Precious was the word. £18.90 just to get into town? Worse was to follow. At Victoria she needed desperately to find the facilities. But what was this – 30p? Thirty flippin’ pence to spend just one (she was amused at her cleverness but still annoyed at the price). “That’s six shillings” she mused. She always thought in shillings when the price of something aggrieved her. It was the same in Spain when she went to Mercadona. She spoke in terms of duros, which she had to explain to her son was the old way to say five pesetas. She realised he thought her quite mad. But such financial issues mattered a great deal to her. She was obsessed, readers from last year may recall, with the exchange rate as she fretted constantly about getting more euro for her pound. At least she had learned that the plural of euro was also euro, not euros.

So it was a rather weary Dolores who finally got to the B&B close to the station for a well-earned kip. Her husband’s largesse did not extend to paying for her accommodation at the swanky hotel where the seminar was on the next day. Not at £285 per night plus VAT it didn’t anyway.
The next day dawned and the rather chatty taxi driver started talking. “Were you here for the Olympics, darlin’?“ he asked breezily. “No” said Dolores “but I did follow that lovely Georgina Cassar’s progress”. “Didn’t see her”, said the driver, “did she get a gold post box then?” Dolores was mystified. A gold post box? Then it came back to her. Of course, she remembered the red white and blue version outside Gibraltar’s main Post Office in Main Street. Someone said it had been repainted because of the Olympicals. Looked better than gold anyway. What a silly colour to paint something that should be pillar box red. She was quite keen on the price of gold as she knew it was “a store of value” which is very useful in the bad times, but a golden post box, well she thought that was too much, really...

The driver had piped down by now. The taxi screeched to a halt outside the swanky hotel. “That’ll be 12 quid love”. “Twelve quid – err, pounds?” Crikey Dolores thought. She knew London was “dear” but no one had prepared her for the fact that London was outrageously expensive. This seminar had better be good.

Well as it turned out just moments later, she would never know. Apparently it was only open to UK residents after all. The girl on the door didn’t seem to know where “gib-all-ta” as she pronounced it was – nor did she seem to care that much. “Don’t you live in OXON then?” she asked. “No” replied Dolores testily, ”I don’t”. It turns out that there was a small but perfectly formed Oxfordshire town that was named after our Mediterranean home, and clearly the invitation had been misrouted by the Post Office to end up in Dolores’ hands on the Rock. Perhaps it got lost in one of those golden post boxes, she thought.

And that’s how she ended up spending the day doing some Christmas shopping instead before making the equally expensive trip back home. So what had she learned? Certainly nothing about finance. Mainly, it was that one must be wary when dealing with any special offer. The invitation had clearly said that the seminar was open to UK residents only but she hadn’t read that bit. Similarly, some things such as QROPS are only available to non-UK residents or at least those with a demonstrable intention to become non-resident. Dolores realised that these details were important and by now she was feeling rather silly.

And that wasn’t the end of it. When she got back home Mr Rock was none too pleased. “Why don’t you just get financial advice locally,” he asked? “ After all, Gibraltar boasts some world-class minds covering all aspects of personal finance from banking through to investments and beyond.”
He went on to show her the Christmas card the family had received from that odd bloke in specs who writes about financial matters in The Gibraltar Magazine every month. What did it say? He remembered that the sentiment was very satisfying. Before carrying on with the Christmas celebrations, he put on his reading glasses, picked up the card and read the words again. Ah yes, here it was.

“A very Merry Christmas and a Happy, Prosperous New Year to anyone reading this, from all the staff at Sovereign in Gibraltar. “

The Financial Puzzle

As we approach the middle of the final quarter of 2012, one has to say that the economic outlook is still a gloomy one - even for a born optimist such as myself. In fact as far back as July 2009, my Gibraltar Magazine column article was titled Green Shoots. Had I known three years ago what we all know now, maybe I wouldn’t have been so keen to call time on the crisis, but life seldom turns out quite as we expect, does it? And in the financial world, that has never been truer than today.
But given my "glass is half full, not half empty" sense of optimism, are there any signs of recovery one can point to as 2012 races towards 2013? Firstly, I should acknowledge that for many, including here in Gibraltar, the year could end badly as more jobs losses are announced and companies continue to struggle or even fail altogether. This is especially true across the border in Spain where many Gibraltarians have been left nursing hefty mortgage payments on property worth considerably less than when purchased.

Sad to report, negative equity - once a peculiarly British phenomenon - has become far too common in Spain. The new government is struggling with an ever deepening recession and chronic unemployment. It ends 2012 faced with providing financial aid not just to its heavily indebted banking sector but to the autonomous regions themselves. The second half of the year has been dominated by talk of an EU bailout and we have seen some civil disorder in the streets.

But away from Spain, are there genuine reasons to be hopeful? I suggest that there are - in certain specific areas - and the hope has to be that these early signs will prove to be long lasting and will manifest themselves in other parts of the economy, leading to an overall change of mood and ultimately recovery.

Consider the situation in the place where it all started to go wrong - the US. There are some real signs of progress and not just anecdotal ones or hyperbole in advance of November’s presidential election. The overall unemployment numbers, whilst still far too high, have recently stabilised. More and more listed companies have been reporting good year-end figures and, as a result, some elements of the stock market are testing levels not seen for several years.

All well and good but the US is such a vast economy and is still the only true global superpower in financial terms. What happens across the Atlantic certainly affects us here but we must face the fact that it’s the situation in Europe that should concern us most. It is upon Europe’s recovery, or at least partial recovery, that we all depend.

Of course in Gibraltar we rely on the financial health of two entirely separate economies for our well-being. I touched on the situation in Spain earlier, but let’s now turn to the UK because, for many Gibraltarians, the state of the British economy has a more significant effect on their daily lives. As part of the sterling area, we are dependent on Britain when considering the all-important exchange rate, especially against the euro. Price rises on imported goods such as fuel and, of course, food, are all largely out of our control.

UK government policy is currently focused on reducing the eye-popping deficit while at the same time attempting to stimulate growth and keep inflation under control. It is a very tricky balancing act. The deficit is still huge but is moving on a positive track. Inflation is now line with expectations and whilst GDP, my favourite measure, is still negative (i.e. in recession), it is marginal and in fact the figure was recently revised in the right direction. All this is somewhat academic but the hope is that by stimulating growth, more jobs will be created leading to higher tax receipts and eventually a permanent reduction to the huge deficit.

In the real economy, companies are still laying off staff and stories of this or that high profile corporate failure still appear in the news with gruesome regularity. At the same time however, others are taking on staff. The motor and retail industries are prime examples recently. There are also real signs that banks are starting to lend again, even if very selectively, which is long overdue given the lengths to which the government has gone to persuade or cajole banks to lend - from quantitative easing and maintaining interest rates at very low levels through to threats of punitive action.

It’s in the UK property market that we can see real, tangible, signs of recovery - fragile though any upturn may be. The truth is that some property sectors are booming; the smarter areas in central London are still doing as well as ever but most British people don’t live in Knightsbridge or Mayfair. What about the rest of the country?

Several major house building firms have recently announced good year-end figures. Considering the reasons why, leads us to one of the easiest comparisons one can make between the UK and Spain - one of great interest to us here in Gibraltar. The two countries differ markedly when considering residential property. Put simply, in the UK there are just not enough houses to go round. Net immigration and constantly increasing demand from the young and first-time buyers mean that this sector is relatively buoyant. Moreover, a number of the house builders are sitting on undeveloped land. Given the chance of increasing bank lending - both to the developers to build houses and to the individuals who want to buy them, the position is likely to become ever more sustainable. And this leads to other forms of spending such as expenditure on white goods, furniture and so on.

In Spain - and indeed many other countries in Europe - the opposite applies. There is chronic over supply combined with no appetite from the banks to lend to the property market. Hence demand is drying up. The situation in both countries could hardly be more different but of course Britain is a nation of home owners - certainly there has been a massive jolt in the last few years but has the national psyche really be changed for ever? I doubt it.

Some consider it a pity then that the UK government is planning such sweeping changes from next year relating to British residential properties that are owned by offshore companies. Aimed at clamping down on what they see as abuse of favourable tax treatment, increased stamp duty has been announced where property is valued at £2m or more and for the first time capital gains tax will apply to properties owned by such companies. We await final details but anyone in this position should seek advice urgently to see whether they are affected.

These new changes may impact negatively on foreign purchasers of UK property who might now think again if the previous fiscal benefits attached to such investment will no longer apply. I suggest though that looking at the wider picture, UK residential property for domestic use - that is where individuals are UK resident and looking to occupy the property themselves or for letting out to others - could well be one of the lynchpins of the putative economic recovery for which we are all so desperate.

Perhaps I might be allowed to misquote Winston Churchill. Are we seeing the end of the financial crisis? No. Not even the beginning of the end. But we might, just might, be witnessing the end of the beginning - at least in the UK. Let’s hope so for our all sakes

But let me end on a cheering note. Next month, the Gibraltar Magazine produces its festive edition. This column will be reporting on a now traditional seasonal visit to the Rock family to see how they are preparing in the run up to Christmas - don’t miss it.

Taming the Lion

Last month I discussed the “BRIC” countries and what makes that group of the four leading emerging economies (Brazil, Russia, India and China) so important to today’s world economy. I also touched on the admission of South Africa, despite its relatively small size, to the group in 2010 to create “BRICS”. Since completing that piece, I attended a dinner hosted by Barclays Wealth at which Henk Potts, the bank’s global investment strategy director and one its best-known personalities, was speaking. Confidently I prepared some deeply cerebral, meaningful questions on BRICS hoping that his responses would provide the basis for this month’s column. And so it did – but not in the way I had anticipated

Henk is known for his robust views but he surprised his audience when he asked us to name regions that were likely to be exciting from an investment point of view in the next few years. “Latin America” shouted one person. “The Middle East”, I spluttered. Someone even said “Singapore”. But no, Henk wasn’t having any of it. The area with most “upside potential”, he told us, was Africa – or the “lion economies”, as he terms them, as opposed to the “tiger economies” of Asia.

Currently these “lion economies” are responsible for only 2.5% of global output. This may not sound a lot, but the figures start from a very low base and should therefore go only one way – upwards. Henk’s thesis got me thinking and I decided to take a more serious look at the data. What I discovered simply astounded me. It turns out that several African economies are growing at the rate of 6% or more on an annual basis.

Regular readers will know that my favourite statistic is GDP – Gross Domestic Product. According to African Economic Outlook statistics, real GDP growth rates across the entire continent of Africa are all in positive territory. Not just a few countries mind you, but every country in Africa is growing. Even Zimbabwe is reporting growth, albeit after many years of decline.

As so often with statistics, the numbers disguise some special situations. For example, Libya is set to grow again this year after a near 40% fall in output the year before. But then it did have a revolution on its hands in 2011. Just compare this situation to Europe where several EU states, not just those inside the eurozone, are suffering badly. The UK and Spain are both experiencing negative GDP growth – or to use a stronger word, recession.

Perhaps it is unfair of me to remind readers of the text message allegedly sent by the current Prime Minister of Spain Mariano Rajoy to his finance minister in June, as the latter was about to go in to a last round of EU bank bailout negotiations. “España no es Uganda” (Spain is not Uganda), he is reported to have texted. That earned a rapid and stern rebuke from the authorities in Kampala, Uganda’s capital, as well it might given that African country’s GDP growth record over the last ten years – around 5% year on year and in seven of the last 10 years significantly above this impressive level.

OK so time for a pretty obvious health warning here before I get carried away. There is a massive disconnect between developed European economies such as Spain and Africa’s emerging economies. Growth is important as I have set out in many previous articles. But it is not the only issue and should be considered in isolation. Other factors such as political stability, the incidence of corruption, inflation, unemployment, poverty levels and so on, all play their part in assessing the real economic prospects for a country.

Nonetheless, the surprising fact remains that every single country in Africa is forecast to grow this year. Amongst other reasons, the impact on several African economies of the exponential growth of Chinese investment in the last decade cannot be overstated. The FT estimates that over US$10bn was invested by the Chinese in Africa last year alone, with the cumulative total now exceeding US$40bn. More than 2,000 Chinese companies from huge state-owned enterprises to small firms are now involved in Africa. Granted, much of this investment is focused on the natural resources so desperately needed by China for its development that it cannot source at home, Mining has continued to be massive business in many sub-Saharan countries and with such investment comes other spin off business. As one example, echoing China’s own recent “mineral rush” in various parts of Africa, expansion of corporate aviation is expected to grow alongside other heavy infrastructure improvements. Surface travel can be difficult, making corporate aircraft often the only option. Sovereign’s aviation division reports that Hawker Beechcraft has focused on Africa as a huge potential market for corporate jet and turboprop aircraft. A senior company executive was recently quoted as saying that growth in demand for mineral resources from emerging countries has transformed Africa and that it is fast becoming a preferred investment destination as African nations increasingly open their doors to foreign investors. None of this hides the awful truth that poverty in Africa remains a desperate problem and no amount of massaging GDP figures can disguise the facts. However as prosperity increases generally across the continent, more stable economic conditions should lead to improved government, and perhaps even this centuries-old scourge may begin to be expunged.

All very interesting but how do European businesses exploit the new opportunities that are clearly there for the taking? After all corruption and fraud remain a real risk in several African countries; anyone in the finance sector will be familiar with the so called 419 Advance Fee scams that emanate with depressing regularity from Nigeria (the number comes from the Nigerian Criminal Code article dealing with fraud).

International groups often separate responsibility for managing different areas of Africa. In the case of the Sovereign Group, for instance, southern African states are dealt with by our South Africa hubs in Cape Town and Jo’burg, whilst north Africa business – broadly speaking the countries of the Maghreb and the Nile Valley – is generally managed from our offices in the Middle East.
But for us in Gibraltar, and indeed those local companies without an overseas office network, whilst it is clear there are vast swathes of Africa to consider, how on earth can we exploit these opportunities effectively and without incurring vastly inflated travel budgets?

Well of course the answer will depend on the type of business one is considering and its scope for African expansion. It may be that services can be offered directly to a new potential client base across the continent. Great care will be needed to insulate oneself as far as possible from the corruption risk or indeed the ever-present danger that one is simply going to be ripped off. But this can happen to the inexperienced when attempting market entry into any new country. Manufacturers or trading firms might be looking at Africa in quite a different light – perhaps by sourcing raw materials or partly-finished goods, or simply looking at new markets given the dire state of economy in Europe. .
Those of us who live in Gibraltar look across, on all but the foggiest days, to the northern-most tip of Africa. Indeed, there are several businesses in Gibraltar that have made their fortune over generations by doing business in Morocco and further afield – but there are many others that have yet to take the plunge.

Tangier itself isn’t a bad place to start in fact. After all it boasts a brand new port facility at Tanger-Med Port, directly opposite Algeciras and is also served by an international airport with adjacent free zone area. If you haven’t visited the town recently, you should pop over to see the dramatic changes to the port area itself. New marina and leisure facilities are being built at breakneck speed to rival those found in southern Spain – much of this the result of foreign inward investment from the Middle East.

But that is of course only the beginning. It’s all too easy to look at Tangier and, perhaps by citing negative experiences or simply by considering its rather colourful reputation, to write off the entire country – or worse still, the African continent as a whole. Further down the Atlantic coast, the commercial city that is Casablanca greets you. It’s certainly not all Humphrey Bogart and Ingrid Bergman – indeed if you have no business to do in the city, there is very little to detain you. But from here you can fly to many cities around Africa, the US, Middle East and beyond. It’s a great place to consider from a commercial perspective. From there, the world – or at least the African continent – is your oyster. With all that is going on in Europe maybe those of us in business here in Gibraltar could do worse than spend a little time and effort looking south – just 12 miles across the Straits – where a continent awaits.

Bric & Back

Anyone who knows me will tell you that I have eclectic tastes when it comes to travel. It has always been a passion of mine, and stems from the encouragement given by my parents back to when I was in short trousers. No matter how hard the times – and we’re going back to the early 1970’s here – a holiday was always on the agenda.

It might have been a camping trip in Brittany, just 30 miles from our home in Jersey, but it was abroad. We were taken everywhere and encouraged to speak the language, eat the food and interact with the locals. No namby-pambiness allowed in our household. You want to try an oyster? There’s a franc, go and ask the fisherman on the slipway. Imagine being allowed to do that now! Nevertheless, the training served me well and all these years later I have visited over 100 countries in total.

So in order to celebrate the significant birthday that has just befallen me, we were fortunate enough to spend a week in one of the most exciting, vibrant (and exhausting!) cities in the world – Hong Kong. It wasn’t my first visit but I saw more of the place this time than ever before and we met several friends who now live and work there. One of them goaded me. “So you’re planning to stay in Gibraltar, then, are you?” he said. “Are you sure Europe is really for you? I mean the old world’s finished really isn’t it? This is where you want to be. It’s all about BRIC countries now, well BRICS actually”.

The last point got me thinking. Europe is on its knees – and I imagine will be so for some considerable time. But are people in the so-called BRIC countries really so much better off than we are here in Europe? Are they so economically superior that we should all simply up sticks and emigrate. To borrow The Sun newspaper’s famous headline from Election Day 1992, “will the last person to leave please turn out the lights”.

Let’s pause for a moment to consider what BRIC (or BRICS) stands for and why the four countries concerned are grouped together in this way? It was the economist Jim O’Neill, chairman of Goldman Sachs Asset Management, who originally coined the term BRIC in 2001. Standing for Brazil, Russia, India and China, the acronym is used to describe the shift in global power and influence away from the old world economies – chiefly the G7 countries – toward the developing world. Some economists estimate that BRIC as a group will overtake G7 in less than 15 years. So what is that final capital “S” all about?

I should say at this point that my Hong Kong-based friend was born in Jo’burg so perhaps it should not come as too much of a surprise that the “S” stands for South Africa. Economists at a Reuters’ summit two years ago decided against BRICS – Jim O’Neill himself said South Africa’s economy was simply not large enough to be included – but, despite this, the political association formed by the four BRIC countries in 2008 invited South Africa to join them in 2010. So BRICS does now exist as a real body representing almost three billion people (some 40% of the world’s population) and 25% of the world’s land surface. But let’s return to the original four BRIC nations.

The idea then is that these massive economies are showing the Old World the way forward, right? Well maybe – but surprisingly perhaps, it’s not all unadulterated good news. Despite the undoubted influence that BRIC now exerts over the rest of the world, all four countries rely on exports and these have been falling due to the their exposure to markets in the “Old World”, the eurozone in particular. Put simply, we are no longer buying as many of their goods. For example some 30% of total BRIC exports are to EU countries; in the case of Russia (which relies heavily on fuel exports) this figure is closer to 50%. Clearly then the on-going European financial crisis continues to exert a negative effect on these BRIC countries and indeed elsewhere.

At the same time, the BRIC countries are experiencing a reduction in domestic demand that is in large measure due to stubbornly high inflation rates. When combined with rising interest rates, it is not surprising that their economies have slowed as a result. In order to stimulate demand, interest rates have been cut in Brazil and more recently in China. The hope is that this should translate into healthier domestic figures during the second half of 2012 and into next year.

The stark contrast between the “Old” and “New” worlds is perhaps best illustrated in terms of my favourite statistic – Gross Domestic Product or GDP. Regular readers may recall that GDP is defined as the market value of goods and services produced in a country over any given period. Normally expressed quarterly as a percentage increase on the previous three months’ numbers, a positive figure indicates a country’s growth rate whilst a negative figure indicates a decline. Two successive quarters of negative numbers is deemed to be a recession. This is the unfortunate position in which the UK and several other European countries now find themselves and, of course, a shrinking economy makes it even harder to turn things around again.

Contrast the gloomy European position with that in the BRIC states. Leading business commentators focussed on the fall in the Chinese growth rate for the first quarter of this year. At 8.1% it was the slowest growth rate in three years. In India, which posted a “mere” 5.3%, one has to go back to 2003 to find such a “low” growth rate. Although not of the same magnitude, strong positive growth rates of 5% and 3.5% are also forecast for 2012 in Russia and Brazil, so one can understand why inflation – always the scourge of booming economies – is such a real concern.

So let us return to my South African friend’s advice that I should be moving to live somewhere in the BRIC(S) bloc. As I have written many times previously, although Gibraltar has been able to insulate itself from the worst effects of the crisis the economic outlook is not exactly rosy in our region – and no doubt there is more pain to come. So as I returned home to Gibraltar from the other side of the globe was I tempted to head straight back?

Perhaps, if I were 20 years younger, I mused. But then as I stared up at our Rock of Gibraltar , I knew immediately where I’d prefer to be. BRIC or even BRICS might represent the new exciting global financial order but I am a passionate supporter of Gibraltar so give me my little corner of the Mediterranean anytime.

None of this is meant to minimise Europe’s problems but it’s disingenuous to write the continent off entirely. We can’t all live in new uber cool cities such as Hong Kong, – or come to that Shanghai, Delhi, Sao Paulo or Moscow – although many of my colleagues at Sovereign choose to do so and it’s often part of my job to persuade – or encourage – yet another to make such a move. Of course, BRIC countries are great to visit (and I have been to them all) but the Rock, and all it has to offer, suits me very well indeed, thank you very much. Not everyone has such a choice of course but I know many people living in this region who think as I do and wouldn’t change it for the world – no matter how much greener the grass might seem to be.

Are you aware of the role of offshore companies in property investment?

Introduction:

Dubai Land Department have recently announced, (as of January 1st, 2011) that it is has banned the registration of Dubai property in the name of virtually all "offshore companies" or companies not registered onshore in Dubai. The one exception to this "offshore company ban" is the Jebel Ali Offshore Company. This new rule does not affect individuals, only foreign or "offshore" companies looking to purchase property.

The following Q&A is to inform non GCC purchasers and investors, of the implications of the Land Department’s new rules, and how the recent changes will affect foreign companies purchasing and registering property in Dubai:

Why would one use a company to purchase a property in Dubai:

There are a number of good reasons why the use of Offshore Companies has become so popular when buying local Dubai property. The most obvious reason would be the avoidance of complicated inheritance procedures. A company does not die. If your property is held in a low cost offshore company, you (and your partner or partners) can own the shares of the company as you see fit. So rather than have your individual names on the title of the property, you have a company name. This is a very easy method for joint investment, for confidentiality, and for organising ones assets under a manageable structure (and in many cases, in a Common Law structure).

So the only "Offshore Company" that I can currently use to buy property in Dubai, is the Jebel Ali Offshore Company?

Correct. This applies only in Dubai. For example, you can still buy property in Abu Dhabi through a BVI company.

The Dubai Lands Department decision of Jan 1st 2011, has confirmed that it will NOT register property title to any foreign company, unless that company is registered offshore with the Jebel Ali Freezone.

But can a foreign company own the Jebel Ali Offshore Company?

Yes. You can for example, use a BVI company, or a common law Trust, to hold the shares of your Jebel Ali Offshore Company. You will still need to clearly show the Lands Dept evidence of the ultimate individual owner(s), with attested share certificates and passport copies.

What about if my property is not yet delivered? I have signed the purchase agreement before January 2011 in my personal name, can I now switch to a company name?

The Dubai Lands Department have an interim property register, and main property register. Until your property is listed on the actual main property register (which happens after handover), then

it is possible to change the title from an individual name to a Jebel Ali Offshore Company, providing you can show that there is no change in the beneficial ownership (i.e. the same individual on the initial agreement, is the same owner behind the company).

But will there be an additional transfer fee, if the sale and purchase agreement is not currently in the name of a Jebel Ali Offshore company?

In order for the registration of title to take place, the developer of the property must issue a No Objection Certificate consenting to the registration in the name of the Jebel Ali Offshore Company. As mentioned above, normally the developer will want to see clear evidence that the person named on the sale and purchase agreement, is the same person as the beneficial owner behind the new Jebel Ali Offshore company. The developer normally charges an administration fee, which should not be more than Dh3-5,000, to issue the No Objection Certificate.

If the developer and Jafza both issue NoCs to the Land Department authorising the registration in the name of the Jafza offshore company, it is normal that the registration can be completed without charging an additional transfer fee, again provided that the ultimate beneficial owners of the new Jafza offshore company are the same as those mentioned in the original sale agreement.

What if my BVI company already holds the title deeds to my property in Dubai?

The recent changes to the policy only apply to registrations of titles taking place from January 1, 2011, and do not affect any that took place prior to that date.

Does Jafza allow offshore companies to own property anywhere in Dubai?

From the 2006 Circular that Jafza issued, it stated that Jebel Ali offshore entities could own property in any project in Dubai that were owned by Dubai World, Dubai Holdings and Emaar Properties.

Whilst we understand that there is no restriction on any freehold property, Jafza offshore companies must still obtain a "No Objection Certificate" from Jafza, in order to register title at the Land Department.

To date, we have not ever had a refusal for an "NOC", when clients are looking to own property outside the projects listed on the 2006 circular.

How is the Jebel Al Offshore Company set up, how much will it cost me?

Set up is fairly straightforward, with the normal due-diligence required on all proposed Directors and Shareholders. It will take about 4-5 days in incorporate, and requires the shareholders of the company to visit the freezone and sign (or provide a Power of Attorney to someone to act on their behalf).

The cost at set up is USD$4,950, and annually there is a registered agent fee of $1950. Sovereign Dubai is one of the oldest registered agents with Jafza, and we have a dedicated corporate services department of 25 people who are there to assist with all company formation enquiries.

What if I want to sell my property, and it is owned by the company, how do I do it?

You have two choices here, you can either sell the property OUT of the company, by simply signing the sale documents as a Director of the company, or you can sell the shares of company, (assuming the company only holds one asset, which is the house). The Lands Dept WILL need to be notified of the change in beneficial ownership of the company, with certified documents to be provided from Jebel Ali Freezone (all of which we can assist with).

Gibraltar

Ian Le Breton is Managing Director at Sovereign Trust (Gibraltar) Limited. He explains why Gibraltar can no longer be characterised as an “offshore tax haven”.

When Gibraltar’s new income tax regime came into force on 1 January 2011, it signalled the end of a long journey to reposition its financial services centre from an offshore tax haven to an onshore European Union (EU) finance centre.

The new regime brought Gibraltar into compliance with the rest of the EU by doing away with the previous exempt status tax regime. The new Act ended any discriminatory distinctions between onshore and offshore business by introducing a single 10% corporation tax across the board.

As an onshore EU country with competitive rates of corporate and personal taxation – as well as the absence of capital gains, value added, inheritance, wealth or gift taxes – Gibraltar now offers opportunities that few other international finance centres, or specialised finance centres as Gibraltar prefers to be known, can match.

Gibraltar firms engaged in financial services are regulated by the Financial Services Commission. Implementation is critically important and by all measures, Gibraltar benefits from excellent regulation. The Gibraltar government is highly responsive; recent changes to legislation have allowed the industry to develop in such vital areas as insurance, funds and investment management. 

When considering financial services, professional advice should be sought at the earliest opportunity.  Options can be explored but it is critically important that corporate or trust structures comply with reporting requirements and that any tax implications are carefully considered. 

One way to demonstrate international credibility is to appear on the OECD Global Forum’s “white list”. The main criterion for achieving such a cherished position was for a jurisdiction to have entered into a series of bilateral Tax Information Exchange Agreements (TIEAs). Demonstrating the willingness of the two signatory countries to exchange information relating to a taxpayer, Gibraltar has engaged fully with the process and entered into such accords with 20 separate countries. 

Gibraltar competes effectively with its peers within the diverse sectors that make up the finance centre. Several global banks are represented providing a full range of banking services and investment management is another important cog in the wheel. In particular, Gibraltar benefits from Experienced Investor Fund (EIF) legislation and its funds regime has a well-deserved excellent reputation globally. Insurance is another vitally important component of the finance industry. 

Under EU “passporting” rules, regulated Gibraltar firms are permitted to expand across Europe in respect of insurance, reinsurance, banking and investment services.

The establishment of companies, trusts and other structures remains core to firms such as Sovereign. The larger firms have diversified into other areas including investment management, accounting and insurance services. A few also able provide marine and aviation services including registration of yachts and aircraft. In our own case, established a quarter of a century ago, we boast 25 offices around the world. With over 70 staff, Gibraltar remains our largest office hence we are well placed to provide the services and advice international clients will need.

Overall then, Gibraltar has a good story to tell. The next time you come across lurid reports about international tax havens, rest assured that Gibraltar is now recognised as a preeminent onshore EU finance centre and all of us in the finance industry are striving to ensure that this story can only get better in the future.

Trust & Company Management: International reach and depth of service

Milestone GRP - The main trend over the last decade has been global integration and compliance. How has this im- pacted  Gibraltar's economy and how has it impacted  the Trust and Company Management industry in particular?

Mr. Ian Le Breton - Looking at compliance, we are regulated by the Financial Services Commission (FSC) with a strong but, at the same time, cooperative hand. They have turned what could otherwise have been extremely onerous, difficult to im- plement policies, into something that remains costly and time consuming, but is  done with a cooperative spirit with them. From  time to time we have discussions  with them,  and the relationship is good. I describe it as a hand in hand approach, not a hand in glove one. It is a partnership type of approach. There is lot of new regulation to take on, and other internati- onal groups, the OECD, IMF, the EU, are going to impact us.

You need to have a pragmatic view and simply live with this, and even the Government cannot  do anything about it. We work with this, whether we like it or not, we have to move with the times  and we do it fairly successfully. That means  that Gibraltar can look to the world and say that we comply with all these groups; we are signing all these TIEAs, we might soon have double tax  agreements, and we’ve moved from being considered an offshore financial centre to what  it is now an international specialised financial centre.

Milestone GRP -  Gibraltar and the  Government  are often described as agile and nimble. Do you agree with that cha- racterization?

Mr. Le Breton - It is very true. Agile and nimble, but also po- sitively reactive is the type of word  to describe it. Proactive too, as we tend, in Gibraltar, to identify trends and adapt to them. That is what we do in Sovereign and a number of firms with whom we share the space in Gibraltar, too. We need to reinvent ourselves as we go along, and any firm like us that does not have this approach is going to find themselves falling behind because legislation and rules are changing all over the world at all times. So if you cannot be agile and nimble then you are lost. That  takes us back to our small but  perfectly formed nature.

It is not difficult to talk to the Government's departments, even to members of the  Government themselves, if we need to, quickly. Obviously legislation changes take time but we cer- tainly have a good rapport with these people and that means that we can be agile and nimble.

Milestone GRP - How has the global downturn affected the growth of the company? What  areas are you are develo- ping?

Mr. Le Breton - We have certainly seen growth  despite the economic downturn. In the last 4 years our staffing has grown by 10%  or more.  As  for our product  here, it is certain that

there is an increasing depth to our services. We do a certain amount of work on the personal pension side, particularly the UK transfers, the  Qualifying Recognised Overseas Pension Schemes (QROPS), and Qualifying Non-UK Pension Schemes (QNUPS), which is a different model altogether but has simi- larities. We are  expending our marine division that is based in  Gibraltar, looking at yachts, and last year we  established an aviation division. Again looking at clients with big jets, big yachts: these are the  types of clients we need to approach anywhere. So our strategy is to use these subsidiary groups to look at markets in a slightly different way.

Milestone GRP - How have Gibraltar’s infrastructure deve- lopment contributed to  these specific opportunities, such as the registration of yachts or aircraft?

Mr.  Le Breton -  The growth  of Gibraltar's  infrastructure  is extremely useful to us. For Sovereign it is important that the infrastructure continues to develop in Gibraltar, not just for the business itself, but also for our staff. It is important that they continue to find this an attractive place to live and work. From Sovereign's point of view, we are one of 25 offices, so whilst we were established here in 1987 and here is where everything started and it continues to be our largest base.

Milestone GRP - Are there any limitations to operating here?

Mr. Le Breton - There are limitations. We are never going to land a jumbo jet at the airport, so are we going to set up direct links with New York with 300 people on board  a plane? No, we will not. But, using this as an example, we have infrastruc- ture that is not right here but just a short drive up the road in Malaga where we have  a full international airport, so that is not a real limitation.
We have a wonderful  time  zone advantage,  the  climate  is great, and this is important since people are attracted to Gib- raltar for its climate and lifestyle. A lot of people like our firm are doing what they can to build it up. We have a lot of compe- tition out there, but generally overall we are doing a good job. I encourage executives from wherever they are in the world to come and have a look.
Milestone GRP - As a well established foreigner in Gibraltar, what do you see as existing misconceptions about the place?

Mr. Le Breton - One area I want to work on is the impression that Gibraltar is just open for the British. That is not the case. Brits make up a percentage of the client base, but just a  per- centage of it, and that is a message I want to get across. We are ready to build our market from around the world. Europe is obviously a main area of course, but there are advantages for other parts of the world, too. Gibraltar is a good place to headquarter a company and maybe the CEOs from around the world may want to start considering that, and then come to talk with us when they do.

Partnerships in today’s world

We keep hearing governments across Europe tell us that “we’re all in this together”. British newspapers in particular seem to take great delight in reporting examples of how some of the more wealthy members of the current cabinet are “out of touch” with ordinary people. The recent story about whether or not to charge VAT on hot “pasties” was just one example. But in general, it seems that most people in the UK realise that by working together – in partnership if you will – things will eventually get better. Certainly the huge deficit is being reined in although there is a long way to go.

Since the last edition, I have had the pleasure of attending the long awaited wedding of two good friends. It was a lovely affair; my partner and I had a very jolly time and we wish the newlyweds a long and above all, a very happy, marriage.

Going to the ceremony got me thinking – weddings do that, don’t they? – and all the talk of partnerships led me down several paths. What constitutes a partnership anyway? And when we hear the term in a business context, is it based on the same principles as two people who call themselves “partners”?

A simple definition of partnership is that it is an arrangement where parties agree to cooperate to advance their mutual interests. But let’s go back a little to explore the term used by individuals in their personal lives, rather than the business context.

Years ago, if one was neither married nor engaged but still committed to another person in a steady relationship, the words “boyfriend” or “girlfriend” seemed to do perfectly well (although I accept it sounded rather odd when describing people old enough to be one’s parents). The term “common law marriage” was one taught to me by my mother although I used to get alarmed at the level of vitriol in her voice when she said “common” – as if there were something dreadfully wrong about it all.

Fast forward 25 years and the word “partner” seems now to be the in-phrase. Time was, just a few years ago in fact, that if I had referred to my partner in polite company, there’d be a short intake of breath for it was taken as read that I had to be referring to another man. In these days when so many people maintain a relationship without ever entering into marriage, the term partner could just as well refer to a girlfriend of several years’ standing. It’s all become rather confusing.

In the UK, it was the Labour government that took the politically brave and potentially risky decision to enact civil partnership legislation in 2004. Possibly soon to be extended to Gibraltar, the legislation set out clear guidelines for the first time relating to the responsibilities of partners and the benefits to be gained from entering into such an arrangement. Aimed at same-sex couples, there have been complaints of discrimination ever since from straight couples who do not wish to enter into marriage but seek the financial and legal benefits of a partnership arrangement. So far the government has maintained that such people can simply get married but sometimes it’s more complicated than that.

The civil partnership legislation is very clear. In exchange for a series of undertakings and legal definitions of what constitutes the partnership between two people, several important benefits arise. The most important implications from a financial perspective are probably those dealing with succession issues and inheritance tax in the UK and the setting out of new rules relating to next of kin and a lot more besides. Sadly – but inevitably – it also goes into considerable detail about how such partnerships should be dissolved.

These new rules in effect brought into force for individuals important aspects of legislation that had previously only been available in a corporate setting. Business partnerships, as we shall see, are nothing new. Legal partnerships come in several shapes and sizes but they all follow a similar pattern. It is also now very common to see the initials LP (standing for limited partnership) or LLP (limited liability partnership) appended to the name of many of our large firms, legal and accountancy in particular.

But hang on. Surely partnerships – law firms, doctors and so on – were not supposed to be able to limit their liability. Wasn’t that the whole point? In exchange for the comforting knowledge that the partners in question, whether they were drafting a contract or diagnosing a condition, were putting not just their professional reputations on the line but also their assets. Of course, insurance was used to mitigate some of this risk but ultimately their judgment, and that of their colleagues, was backed by individual partners’ wealth.

In several jurisdictions, many of them based on English law, partnerships as a separate legal entity have become far more popular in recent years. Essentially the intention was to retain the benefits of partnership whilst allowing at least some protection associated with limited liability. But this concept is not restricted to English law and is certainly nothing new.

In the third Century BC, Roman societates publicanorum exhibited many similarities to the company structures we see today – but at least one partner had to be included who was fully liable for the entity’s debts. Across the Islamic world too, such arrangements became common. In Europe, the Italian commenda of the tenth Century were the forerunners of the LPs and LLPs we see today.

As always there are differences across the various jurisdictions where such structures can be established but the general principles are similar enough. A limited partnership may typically have up to 20 members, at least one of which is a “general” partner. This general partner has the power to bind the partnership by entering into contracts and so on and also assumes unlimited liability for the debts and obligations of the partnership. This potential liability can itself be mitigated if the general partner is itself established as a limited company.

In these circumstances, the other partners could enjoy “limited” liability in respect of the partnership in much the same way that shareholders in a company know that their financial risk is limited to the amount of capital that they have invested into the company. It follows that these limited partners may not take part in the management of the company nor are they able to bind it contractually. The limited liability partnership differs in that there are limitations in liability for all partners.

Assuming such partnerships are properly structured from the outset, limited partnerships can be extremely flexible. Within reason, they are able to do anything a “natural person” – that is someone like you or me acting in an individual capacity – can do. A partnership can enter into contracts, own assets and, importantly, it can carry on in existence despite any changes in the status of the individual partners. In other words, in many ways such partnership “entities” are much more closely related to companies than a traditional partnership of old.

Tax advantages are likely to result because, generally speaking, these types of structures are established so that profits are taxable in the hands of the partners rather than the partnership itself – in the US, this is often referred to as “look-through treatment” because the taxman will “look-through” the partnership structure to assess the individual partners. Additionally, limited partnerships allow for the issue of shares in cases where other corporate facilities may not be desirable.

In summary, partnerships can offer the managers of businesses a more flexible, modern approach to liability and risk management in general. Their benefits were there for the Romans more than 2,000 years ago and I imagine the law relating to partnerships will continue to develop further in millennia to come. They are not necessarily simple to establish so, as always, professional advice should be sought at the earliest stage.

And so back to those friends whose marriage we have just celebrated. I happen to know that they read The Gibraltar Magazine – at least I hope they do for the lady in question happens to be the magazine’s editor. From my own partner and me and on behalf of my colleagues at Sovereign too, I say congratulations and we wish you a long and happy partnership.

Investing in today’s uncertain climate

People reading my piece last month about the state of the world’s economy may have detected a more pessimistic tone than in previous issues. This was not accidental. It came about as a result of the continuing Eurozone crisis in particular and other areas of concern in general that suggest it is going to be a considerable time yet before things start returning to normal.

In particular, one of my Spanish readers took umbrage at my rather negative comments on the position in his country. But the truth is that we see record levels of unemployment in Spain – the highest in Europe – the end of the construction boom and painful austerity measures adopted by the new government. The intention is to reduce the sky high deficit in what is after all a contracting economy – i.e. one that is clearly in recession. Developments since my piece last month have simply confirmed the negative outlook.

And when I say it will be some time before things start “returning to normal” I do not mean “back to where we were before”. One thing this crisis should have taught us is that simply adding to the debt mountain to pay for current expenditure is plainly not sustainable. But as I also tried to make clear last month, it’s not all unadulterated doom and gloom. There are distinct signs of improvement in certain economies – or should that be in certain sectors of those economies – that provide real evidence that growth is returning as opposed to a financial commentator’s sense of optimism.

For example, there is real evidence that many of the stronger companies in Europe and across the Atlantic in the US are building up huge cash reserves. It is all too easy to be totally negative when reading reports on practically a daily basis that this company or that has either announced losses, collapsed into administration or filed for Chapter 11 bankruptcy protection – the curious American convention that broadly speaking allows a bust company to carry on trading whilst conveniently ignoring its creditors, at least for a while.

The reality however is that capitalism relies on investment, mainly into companies be they private or public, and there is still a great deal of investment going on. As usual when discussing investment related topics in this column, anything I say is my personal view and should not in any way be construed as advice. So is this the time for those private investors who may have stood back from the markets in the last few years to start considering their investment options?

After all, individuals in the happy position of having savings or maybe cash released from sales of property, other assets or perhaps those in receipt of an inheritance are not going to see decent returns from bank deposits any time soon. True, some of the banking institutions are currently offering more interesting products whereby returns are considerably higher than the pittance offered on regular bank deposits, but with inflation in Gibraltar and other areas stubbornly high, due in very large measure to constantly increasing energy prices, the net return (that is the real increase in the value of one’s investment after one deducts the effect of inflation) is still disappointingly low.

I was minded to have a look at the investment climate for private investors when preparing this piece, not least because of the publicity generated locally in recent weeks concerning the changes in the EIF rules here in Gibraltar. The acronym stands for Experienced Investor Fund and the original legislation was enacted here in 2005. The funds can be used to invest in a wide range of asset classes and can also be established using what is known as a Protected Cell Structure for even more flexibility. New rules have been agreed that will enter force next year. These will enhance significantly the appeal of the Gibraltar EIF which is of course good news for local firms and the employment they generate. For a summary of the recent changes that should lead to increased international interest in Gibraltar, I refer readers to the excellent article penned by Grant Thornton’s Adrian Hogg in the May 2012 edition of The Gibraltar Magazine.

Gibraltar is well placed to compete in this area and with the infrastructure and industry experience to be found here, I can see significant growth opportunities. Gibraltar is of course a full EU member so can exploit its ability for investment firms to “passport” their services, something not so readily available to competing jurisdictions such as the Channel Islands and Cayman.

So this is all very well and good but let’s step back a moment. Is an investment fund a suitable way for ordinary people like you and me if we are considering investing or is it just something for these “experienced investors”. What about the rest of us?

There are many thousands of investment funds to choose from and they come in all types of shapes and sizes but the broad principles are straightforward. There are a number of very good reasons why a new investor might want to consider using a fund when thinking about their options.

By using a professional fund manager, an investor will benefit from years of experience and access to the world’s financial markets that are simply not available to the general public. Depending on the fund, they may provide diversity by asset class or geography while the level of risk involved can be matched to the deemed risk appetite of the investor. Every private investor will be different. It is easy to see why someone a year or two away from retirement will have a very different investment outlook than a single thirty-year-old with no dependents (Incidentally, most 30-year-olds will probably say they have no spare money to invest anyway but, as I was told, “it’s never too early to start”.)

But would anyone want to invest in the markets these days? It would be all too easy to say no, stay away, but times of uncertainty are also times of opportunity. Certainly, careful selection is needed and above all professional advice should be sought right from the outset. It is altogether too easy to look, say, at the (fictional) Ruritanian stock market and see that it has gone up by 60% in the last 12 months. But if the Ruritanian currency – the Cowrie Shell – has depreciated against the pound by 50% over the same period then it starts look rather less attractive. Add to that the problem of researching the right investments in Ruritania, the dangers perhaps of nationalisation or civil strife, and one can begin to see the inherent risks involved in such international exposure.

So if you do wish to invest in that particular country, it is better to do so as part of a regulated fund in which you are investing alongside others. In this way, the costs and the risks are spread and there is a professional team to make sure that investments are properly managed, monitored and administered.

So here’s my summary. If you are considering investment possibilities, there should always be markets somewhere that should be attractive. Many economies around the world, particularly in Europe, are still struggling and may do so for some time. Despite this, or maybe because of it, there are going to be opportunities for future growth or recovery. And with virtually zero returns available on deposits, if nothing is ventured then nothing will be gained.

The World PLC is Unwell

“World plc” is unwell. Before anyone gets the wrong idea – this is after all the Finance Column – I’m not about to stray into areas medical, psychological or spiritual. But after a period of extreme economic intoxication and dissipation, it seems appropriate to echo The Spectator magazine which, whenever the lifestyle of its late “low life” correspondent took its inevitable effect on his health and reliability, would simply post the notice "Jeffrey Bernard is unwell" in place of his column.

Conventional wisdom tells us that the onset of the present financial crisis dates back to 2008. But that only tells us when the disease presented – the symptoms were certainly there well before 2008. In Spain’s case, for example, the housing boom that ended in such a spectacular crash had been building for a decade or more.

It’s clear that World plc remains on the sick list – and parts of it are still in a critical state. As with any illness, it took a while before any doctors were consulted and still longer to think about taking the nasty medicines they prescribed. Second problem. The doctors were faced with so many competing symptoms when World plc was admitted for treatment that it was difficult to know what to tackle first. These and other questions have plagued world markets ever since. Now that we are fast approaching mid-2012, I thought I would step back and consider where we are now (My “plain English campaign” also demands that I try to explain, in passing, what on earth is meant by a “haircut”, quantitative easing and the LTRO).

It won’t surprise readers that when considering the overall state of World plc’s health, my first answer is to say that it depends on which bit one is considering. Before looking at those countries that affect us most here in Gibraltar, let’s start with the worst European case. Greece’s problems have been gripping the financial markets. Readers could be forgiven for thinking that Greece is now sorted. After all, a haircut has been ordered, EU funds lent and austerity in place. Problem over, right? Err, no – not exactly. Read on.

In March, Greece finally secured backing to cut over €100bn from its total government debt. The vast majority of Greece’s creditors accepted the terms – this is the so-called “haircut” on bond yields ­– and, as a result, the EU and IMF have agreed to the latest bailout worth €130bn. The objective is to cut Greece’s government debt from 160% of GDP to a little over 120% over the next eight years.

All seems well and good. The Greeks are off the hook and those who have had to take losses on their bonds seem to have accepted that this is better than a complete default. EU politicians are preening themselves at a job well done. All jolly useful given imminent French elections and the fragility of the German coalition.

The problem is that the crisis hasn’t gone away. Sure the Greeks owe substantially less now than before – but it’s still a debt mountain that will be impossible to finance in an economy that is not growing. And Greece is certainly not growing – it is contracting at an alarming rate. As tax revenues shrink and welfare costs rise, it is difficult to see how Greece can comply with the new debt restrictions. Unless of course there is a third bailout and Greece contemplates leaving the euro. Nothing much changes does it?

Closer to home it is said that Spain is nothing like Greece, and in many ways that is true. Spain is quite simply “too big to fail”. The economy is not contracting at anything like the same rate and the recently-installed Spanish government has just brought in an austerity budget more radical than anything seen before. As a consequence, officials admit that 2012 is likely to be the most difficult year yet for Spain since the onset of the crisis

Normally bullish, in recent months I have become rather more pessimistic about Spain’s chances and whether this “austerity” medicine is going to work. Firstly, after 25 years of spending, the Spanish don’t like austerity. Look at the shiny new airports, motorways and AVE trains criss-crossing the country at 200 mph. The collapse in the property market has been astonishing. Literally millions are out of work with little or no chance of imminent re-employment. In places across Spain one person in three is out of work. Nationally the official rate is more than 23%.

Aside from increased welfare costs, another result of all this is that hundreds of thousands of Spain’s young are moving abroad to find work. London is just one example where the Spanish diaspora has grown exponentially in the last couple of years. Those leaving are more likely to be better educated, perhaps bi-lingual and more skilled. None of this bodes well for the future.

Across much of the EU, particularly across the Mediterranean, recovery is as far away as ever. The problems confronting Portugal, Italy and others remain. During a recent competition aimed at stimulating ideas on what to do about the Eurozone crisis, 11-year-old Jurre Hermans from the Netherlands got it about right. Singled out for a special mention as the youngest entrant in the recent Wolfson Economics Prize, his suggested solution for sorting out the crisis in Greece used slices of pizza as an analogy with Greeks exchanging their euro for “new drachmae”. It remains to be seen whether this will happen but in an effort to ease the strain elsewhere, the EU has joined the US and the UK by increasing market liquidity. Oh dear, jargon time again.

“Quantitative easing”, as undertaken by the US and the UK, is quite simply the issuing of government debt that is then purchased by the government. The result is that more money is pumped into the economy. National debt rises but the idea is that this is better than the alternative scenario. The EU’s version is called the Long Term Refinancing Operation (LTRO). Under this initiative, hundreds of billions of euro are lent to banks at extremely low interest rates for three years in an effort to facilitate bank lending. Even if the intended lending doesn’t happen, the banks have at least used the facility to shore up their balance sheets – so easing the strain during the crisis.  

So how about some good news? There are signs of a fragile recovery in the US and it is perhaps to be expected that it is in the States that the global recovery will begin. After all, there’s the small matter of a US presidential election to distract us between now and November. Another country that has actually taken a strong dose of the austerity medicine is the UK.

The British government is faced with a slowing service sector, a limited manufacturing base and a massive public debt burden. There is little or no room for manoeuvre in areas such as reducing interest rates or raising taxes. Yet one can point to several areas where the UK economy is starting to recover – albeit very gradually and vulnerable to external shocks. The UK’s currency floats freely depending on the world’s view of how Britain is doing, which is not a luxury available to the eurozone. This is one reason why all of us in Gibraltar take a keen interest in the UK and the impact seen on the euro exchange rate.

And in Ireland, there are some real signs that the recovery may be happening. Earlier this year Taioseach Enda Kenny said that by nature he was an optimist and that “Irish people are very pragmatic”. Ireland was the first EU country to approach the EU for assistance. Its banking system collapsed and several years of painful austerity lie ahead. But the “pragmatic” Irish are taking their medicine and, by all accounts, it is starting to work.

We have also come to realise that the US is no longer the only “superpower”. The effects of China’s insatiable appetite for natural resources can be readily seen in Australia, Africa and Latin America. Add to that the impact of Middle Eastern money – “sovereign” or state funding – that is buying up assets from Western banks and factories to hotels and football clubs, and we can readily see that the world economic order has changed for ever.

Contemplating just these few examples, my conclusion is that the economic prognosis is a very fragile version of the Curate’s egg – good in parts, but still pretty bad in others. And here’s the rub. Globalisation means interdependency. Those countries that are seemingly in better shape than others are dependent on growth elsewhere to create a market for their goods. There is still a long road ahead and we’re all in this together. I can’t tell you when the medicine will start to work but I know it has to work, eventually. As the editors of The Spectator surely appreciated, it is all very well to say “get well soon” but it may be better just to say “get well”.