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.