First published in the Gibraltar Magazine October 2009

Last month I looked at some of the reasons why property prices in offshore jurisdictions such as Gibraltar are holding steady, while those across the border in Spain are heading south. As I pointed out, one of the principal drivers of this phenomenon has been the increased demand from people who are currently resident in the UK but are considering becoming "ex-pat" in the next couple of years.

For many, this is to escape the inevitable hikes in personal income tax that will be necessary as the UK climbs its way out of recession and begins to tackle the mind boggling deficit (or national overdraft as I like to think of it) that it has accrued in the process. Already, the UK government has announced an increase in the top rate of tax to 50% for high earners – defined by the government as being those earning more than £150,000 p.a. Add to that national insurance and other indirect taxes such as VAT and one begins to understand why it is that many UK residents are actively considering their options.

As we know any British citizen can consider a move to Gibraltar – there is no requirement for a work permit and, as I have pointed out in this column several times, there are good reasons to contemplate working here. As elsewhere in the world, the global recession is having an impact but so far we have been cushioned from some of its worst effects. Finding a job to suit your particular skill set may not necessarily be easy in a place the size of Gibraltar. But once you have cleared that (albeit major) hurdle, the rest of it – getting accommodation, opening a bank account, dealing with the utility companies – is likely to be very familiar.

But how does Gibraltar seek to attract the multi-millionaire? After all at this level, as I established last month when looking at comparative property prices, the competition is stiff. The Channel Islands, Isle of Man, Switzerland and Monaco are just a few of the options in Europe, so how does Gibraltar compete with these?

I can never resist telling people "it's the sun that does it". This was, after all, one of the main reasons I relocated to Gibraltar – the long damp winters in London were not for me. But sunshine alone is by no means enough to satisfy sophisticated multi-millionaires. As far back as 1992, the government realised that one way to attract high earning, high spending new residents was to offer them an attractive tax package. With this objective in mind, the Qualifying (High Net Worth) Individual Rules 1992 came into being. Updated and amended several times since – most recently in the July 2009 Budget – the rules are easy to understand and highly beneficial.

Why would someone want to become a "Category 2 resident"? Saving tax is the simple answer but, in my view, the benefits to an individual go further than that. A Category 2 resident is subject to a maximum income tax bill of £25,880, regardless of their total worldwide income. So for someone earning, say £250,000 p.a., the advantages when compared to the UK alternative – especially at the forthcoming 50% rate – are obvious. And because the maximum is capped, the attraction becomes even more obvious as income levels rise.

Moreover, the Gibraltar government does not insist on a Category 2 resident spending a minimum amount of time in Gibraltar. So provided that the individual does not unwittingly become resident somewhere else – for instance by spending more than 183 days per year in Spain – it can be very attractive to people who choose to divide their time between several different locations, or perhaps afloat on their yacht.

How does someone go about applying for Category 2 status? The government guards the scheme carefully and has to be strict when it comes to ensuring that the rules are correctly observed. Sovereign specialises in this sort of work so give me a call for more detailed information or to discuss a specific case, but I can summarise how the scheme works in general – read on.

The rules are perhaps not difficult to understand but may not be so easy to attain. There is a simple application form (and a fee of course!) and the following criteria must be met. Firstly, the applicant must not have been a resident of Gibraltar during the previous five years, nor been engaged in paid employment here. Secondly, he or she must demonstrate a net worth of at least £2 million; the value of the principal residence is generally not included in this calculation, although there can be exceptions. Applicants must also demonstrate that they will be able to continue to meet the criteria in future years.

Lastly – and this is very important – approved residential accommodation must be available to the applicant and must remain available for the duration of his or her residency certificate. Whilst the rules allow for property to be either purchased or rented, it must be available for the exclusive use of the applicant – no sub-letting is permitted. The government allows a reasonable period – usually three months – from the issue date of a Category 2 certificate so that an applicant has time to find a suitable property to purchase or rent, safe in the knowledge that Gibraltar residency has been approved.

What does "approved" mean and how does this property rule work in practice? Certain residential developments in Gibraltar are designated by the Gibraltar government as being suitable for Category 2 status. Essentially this is determined by the sale value and associated cost of monthly rental – and this designation can change. Some years ago, for example, the complex that I live in was considered "eligible" but with new, more expensive developments coming on stream, my particular block no longer retains this status.

Should this upset me? Well, no. I cannot deny it would be nice if it still met the necessary value criterion, but that's life. It also helps to answer the question I posed at the beginning – are High Net Worth residents good for us? Of course, a large influx of Category 2 residents may inflate property prices at the top end of the market but, because the designation is fluid, this does not mean that they will be pricing others out of the market. And if you assume that new High Net Worth residents will spend money in our economy, be it on goods and services or simply eating at our restaurants, then the answer is unequivocally yes! They are good for us. We should continue to welcome these people – and their wealth – for the benefit of Gibraltar as a whole.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.