There are some fine houses on Jersey in the Channel Islands. One of the most beautiful I visited was Gouray Lodge. It overlooks Mont Orgueil Castle and Gorey Harbour. It is also the business address of Horseman Capital Management, a hedge fund for sophisticated investors.

Like many such homes in Jersey, it has park-like grounds, separate housing for staff, and garages containing Ferraris and other exotic vehicles. These await the ferry to open up their engines on the French motorways.

Gouray Lodge, back entrance. Photo: Colin Pallot

Jersey, about the size of Waiheke island, is home to over 100,000 people. It has bank deposits and funds under management of more than 5x that of New Zealand’s.

The island receives a steady stream of enquiries from wealthy Britons wanting to move there permanently.

These individuals are often wanting to escape two of the most hated taxes in Britain — capital gains tax and inheritance tax.

The island does not have these. By moving to Jersey, these individuals may end their tax residency in the UK. London is only a 40-minute flight — and there are about six flights a day connecting the island.

Our brush with CGT

As an investor, I opened one of my nice bottles of French wine the other week when the Ardern government dismissed the proposed CGT. Perhaps Winston and plenty of property and share market investors did too.

It would never have been good for NZ. Once you implement a capital gains tax, people begin hoarding property.

‘Well, I don’t think we should sell the property portfolio,’ people say. ‘Because there will be a hefty CGT bill out of the sale proceeds. Let’s just keep it in trust for the next generation.’

This creates further inequity.

The government then needs an inheritance tax: the dreaded death duty. So you pass away — whether the property is in trust or not — beyond a reasonable threshold, you now owe the government a big chunk of your assets.

For individuals in the UK, IHT is 40%, levied on everything in your estate above £325,000. You can’t trust out of it. And even gifts given while you’re alive may still be taxed.

Count yourself lucky, New Zealand. Had you gone down the CGT path, at some point, you could wind up with IHT.

CGT dead in the water?

Looks like Winston was the unlikely saviour protecting Kiwi capital.

Comments around complexity were apt. When you introduce a new tax, an entire industry of tax allowances and mechanisms emerge. The tax becomes even more unfair. Sophisticated and wealthy individuals alter their affairs to benefit.

In Britain, many people take the opportunity to leave.

Here in New Zealand, more people would likely have moved to Australia.

There is a CGT system in Australia. It appears much lighter than the one proposed by the Tax Working Group, since it discounts gains on assets held for at least a year. The discount is 50%.

Moreover, there are many stable and successful countries which attract people and industry to them, because they do not tax capital and preserve the sanctity of property rights.

These countries include Switzerland, Singapore, Belgium, Malaysia, Hong Kong — and after this escape, New Zealand.

Just as well. We’re located at the bottom of the world. Our entire population is less than some large cities. We depend on capital and enterprise to develop our resources and trade with the world. We are not part of any major trading bloc.

Tax capital and you tax investment.

Tax investment in a small nation and you won’t just cool the thermometer of economic growth — you risk shattering it. [openx slug=inpost]

When capital is under threat

The Tax Working Group report threatened capital and property rights. The Labour Party has a history this past decade of attempting to introduce capital taxes and then being bet into swift retreat.

In 2011, when leader Phil Goff announced it as centrepiece of their tax policy, they were nearly wiped out of the game. That election, Labour gained only 27% of the vote as National surged above 47%.

MMP seemed to shield us from the talons this time. But it may not always go that way, particularly if this group can govern with the Greens alone, who are CGT friendly.

The most democratic line coming out of the debate — ‘No public mandate’. Taxing capital is un-Kiwi.

This is a country made up of historic and recent migrants looking for a better life. People who want to build up capital, have a stake in property and reach their potential.

Ownership, capital and property rights must remain sacrosanct. Otherwise we start looking like the countries we escaped from. Britain. Italy. China. India. South Africa.

These countries tax not just what you earn but what you own. So you never completely own it.

How to invest when capital is under threat

I favour global shares in good businesses that pay dividends.

Shares outside of New Zealand and Australia are one of the few areas the Tax Working Group put off limits, since there is already a regime in place known as Fair Dividend Rate (FDR). Essentially this means the most you will ever pay in total tax on international equities is 5% of the opening portfolio value at your marginal tax rate.

The Kiwi dollar has been weakening. There is uncertainty ahead with the prospect of yet lower interest rates and a capital gains tax. Unemployment has been rising with 10,000 more people unemployed last quarter. It’s getting harder to buy offshore currency.

One bright spot remains the UK and Europe — particularly for non-resident shareholders in CGT-free countries like New Zealand.

Brexit has weakened the pound, even against NZD. The euro also remains at a relative low point as the EU grapples with low rates of economic growth and government debt in certain member states.

National Grid [LSE:NG] offers an income stream with the prospect of some growth. The company is a bit like Vector but more diversified. It owns electricity and gas transmission assets in Britain and the US, reaching 10s of millions of customers.

The dividends look to be growing. For 2019 and 2020, you’re looking at projected dividend yields alone of 5.6% and 5.7% respectively.

Meanwhile the demand curve for electricity could snap upward. Burgeoning EVs increase demand on the grid. The UK population is growing, projected to reach 73 million people by 2041. More lights will be switched on.

The company also controls assets on the US Eastern Seaboard and is spreading further into Europe with its Nemo Link joint project, launched to create a power link between the UK and Belgium.

So if you’re happy to hold National Grid for the long-term, you could enjoy a healthy holding income and the prospect of tax-free growth. Something local investors in the UK will not enjoy. Unless they move to Jersey or New Zealand.

There’s one big risk which has been partly factored into the price. Jeremy Corbyn has threatened to privatise key UK infrastructure assets, particularly monopoly businesses.

However, this could be difficult in the case of National Grid, which contains offshore assets. In any case, there would need to be a buyout of the current shareholders at fair value, lest the government risk legal challenges from the many global institutional investors.

Brexit — deal or no deal.

CGT — a bad memory or just shelved for post-Winston.

Either way, solid assets like National Grid are always going to generate a global income stream you can own.


Simon Angelo

Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo owns shares in National Grid [LSE:NG] via wealth manager Vistafolio.