Is buying property in Gibraltar a rock-solid investment?

The neighbours can be sticky but that hasn't stopped a flurry of property investment, writes Graham Norwood

Gibraltar is celebrating 300 years under British sovereignty this summer with two controversies and one highly unusual problem – too few wealthy people live there.

The disputes in question are all too familiar to the 30,000 residents on this peninsula off southern Spain. The first is over who should govern: Madrid regards it as idiosynchratic that this 2.6 square mile patch of land should be British and engages in occasional spats such as last week's tightening up of border controls.

The second dispute is over its status as a tax haven, a term Gibraltar's rulers hate. Instead the government, which derives most of its income from oil storage, tourism and online gambling, prefers the term 'international finance centre' to describe its regime of low income tax, no VAT, no capital gains tax, no inheritance tax and no estate duty.

Successive referenda and hard-line opposition to negotiating with Spain by recent British governments have put the argument over sovereignty to rest for the time being.

But the global downturn and international pressure on tax havens to increase transparency have forced major fiscal reforms on Gibraltar, including a deal struck this year to exchange tax information with major EU countries. Put simply, Gibraltar has had to clean up its act – and that includes on housing.

"For a long time there were 'brass plate' firms run by people who bought a home – often just a tiny flat – to get Gibraltar's tax advantages. They didn't do anything for the community and weren't based here or providing jobs. That had to end," says Sammy Armstrong, who runs the local branch of Savills estate agency.

As a result, 'Category 2' residents (the richest) must now have 'approved residential accommodation' appropriate to the size of family in whose name they are purchased.

In return, these Category 2 residents are liable to tax only on the first £80,000 of their assessable income, providing they have a 'qualifying certificate'. To obtain one, they must apply to the Gibraltar government with two references, one of which should be from a bank confirming assets of more than £2m.

So far, so similar to many other tax havens that have become more transparent in recent years. But there the likenesses end. For while Gibraltar is undeniably sun-kissed, it is a far cry from Grand Cayman or Monte Carlo. It looks every inch the former naval garrison it is, littered with disused Ministry of Defence buildings, old-style UK suburban housing and shopping facilities far below the quality available in most low-tax destinations.

Perhaps unsurprisingly there are only 350 Category 2 residents and the authorities want more. James Tipping, director of the official finance centre, says Gibraltar "must increase the quality and volume of luxury housing" to attract them.

Therefore recent years have seen a flurry of building activity. Tradewinds is a typical marina development of 81 apartments in three towers by British builder Taylor Woodrow. Prices range from £319,000 for a studio to £615,000 for a two-bedroom flat, available through Bray Properties (brayproperties.com).

Ocean Village is another marina complex but has seven pools, tropical gardens, a health club, casino and shopping mall. A 16th floor two-bedroom penthouse with a terrace and private parking space costs £895,000 (oceanvillage.gi and savills.com).

At the higher end, Savills and Chesterton Humberts (chestertonhumberts.com) are selling Buena Vista Park where villas cost from £995,000 to £2.6m and have views across the Bay and Straits of Gibraltar towards Africa.

The market appears to have responded to this surge of new schemes. Armstrong says: "There are more properties sold than coming on to the market. In some instances, prices have increased by five to 10 per cent in two years."

Mike Nicholls of Chesterton Humberts, another British agency with a branch on the peninsula, says: "Britons are buying across the price spectrum. Some use Gibraltar for a tax base and rarely visit, although that trend is decreasing. The majority are now buying to live in, enjoy and have Gibraltar as their true home."

Heavier taxes introduced over the border by Madrid have apparently also led some wealthy Spanish to seek a low-tax alternative home.

Josiane Richardson of Richardson's, another Gibraltar agency, says: "Many Spanish residents are fleeing Spain with a view to gaining Gibraltar residency by purchasing. This has had a significant impact on the market. During 2012 and early 2013, stock stood at 200 properties. Over the last quarter this reduced to 150."

Spaniards who do move to Gibraltar will have a culture shock. The main supermarket is Morrisons, police have old-style British helmets and there are still red phone boxes. More positively, perhaps, there are no tuition fees to be paid by Gibraltar-based students attending UK universities and most pensioners get free prescriptions.

This look of Barry Island, rather than Barcelona, is what attracts many Britons, even if they are not all wealthy enough to take full advantage of the Category 2 tax perks.

"It's wonderful. Everyone speaks English and it's like Britain was 30 or 40 years ago. It's one of the safest places in the world" says Julie Thompson who owns a healthcare business in the UK. In 2011, with her retired husband Edward, she left Manchester and bought a marina apartment in Gibraltar.

The couple are raising their grand-daughter on Gibraltar. "The teaching curriculum is English but the classes are smaller," Julie says. "Young people go out and stand on street corners here to chat and laugh. They're not drinking and not in gangs."

If that sounds idyllic, Gibraltar is for you. If it sounds a little too much like the Britain of yesteryear, remember how close you are to more fashionable parts of Europe – Marbella, Sotogrande and Puerto Banus, three of Spain's best-known locations, are only an hour's drive away.

Buying in Gibraltar

Most Britons buy in one of three areas — South District, which has little industry, Catalan Bay for those wanting beach-front homes, or the town centre

A two per cent deposit is standard when your offer is accepted

There is no stamp duty on homes below £200,000 rising to 5.5 per cent on expensive properties

Older homes are mostly freehold but all land on which modern developments are built will be government-owned so has a maximum 150-year lease

Legal fees are typically 0.5 per cent of the property purchase price