Here’s what Osborne tweeted out this morning.
It was probably something I ate, because I woke up in a rather sceptical mood: what’s the “gain” he’s referring to, I wondered?
So I looked at the HM Treasury Press Release. It doesn’t tell us much. But it does say that:
The Chancellor has today (13 November 2015) authorised a record-breaking £13 billion sale of mortgages acquired by the government during the financial crisis.
And the word “gain” seems to refer to the fact that the price achieved represented a £280m (or “almost £300m” as the Press Release goes on helpfully to observe. Political rounding, you might call it) surplus over book value.
That’s not especially illuminating because, if I have an asset worth 100, write it down in my books to 10, and then sell it for 30 I can say I’ve made a “gain” on book value of 20 even though actually I’ve lost 70. But because I didn’t know the actual cost to us of the mortgage book – known in the trade as the Granite Portfolio – I left the point alone.
But then I wondered: who purchased it?
Well, it’s something called Cerberus Capital Management LP – “one of the world’s leading private investment firms” – and it’s been on a buying spree of real estate debt from across Europe (as its website helpfully points out) including Germany, France, Britain and Scandinavia. And it seems to be buying this debt through what the Irish Times describes as “a network of Irish companies” Special Purpose Vehicles (SPVs if you’d like to pretend to know what you’re talking about), each of them owning hundreds of millions or billions of pounds of assets but having no Irish employees and paying no Irish corporation tax.
The Irish Times is pretty brassed off about this – well, wouldn’t you be if you were Irish? – but is there a UK angle?
Reader, there is.
The bulk of the loans in the Granite Portfolio pay interest at 4.79% – so says the Financial Times at least. Calculating 4.79% of £13,000,000,000 on an eight digit pocket calculator is a little tricky but I think we get to £623m per annum of interest income. If that income were subject to UK corporation tax (even at our special low low rate of 20%) it would generate UK corporation tax receipts of £125m per annum – less any expenses of course.
But by selling it to Ireland all those prospective tax receipts go to… hang on… the Irish don’t get them either. We don’t and it’s a racing certainty that no-one else will. Typically they disappear off to a Dutch or Luxembourg Company where they’re received as a dividend and are tax exempt.
Cerberus, by the way, is also the name of a “monstrous multi-headed dog who guards the gates of the underworld, preventing the dead from leaving.”
I don’t know that Cerberus have brought the Granite Portfolio through an Irish SPV. But the Irish Times tells us that Cerberus have used this structure to buy other UK property loans – so it’s a reasonable bet. And I’m sure HM Treasury will tell us, if anyone cares to ask them.
We could, of course, have insisted on a UK buyer. That way, we would have kept in the national coffers the contribution made by £623m of annual taxable income. But because a UK buyer would have had a tax liability on that income he wouldn’t have been prepared to pay such a high price. And George Osborne wouldn’t have been able to send out this morning’s tweet trumpeting his “gain”.
I should mention for the sake of completeness that a UK borrower is in principle required to deduct and pay to HMRC 20% tax when he or she pays interest to a foreign lender. This can be reduced or eliminated if the UK has entered into a so-called ‘double tax treaty’ with the country in which the foreign lender is based. It will not surprise you to learn that the UK has entered into a treaty with Ireland, and the rate of tax the UK is entitled to deduct under that treaty has been reduced to… zero.Follow @jolyonmaugham
11 November 2015:
Note (1) I now know that the Granite Portfolio was sold to a Dutch Company, Cerberus European Residential Holdings B.V. My understanding – I put it no higher than that – is that this leaves all of the points made above intact.