On 23 March 2021, changes to tax rules for investment properties took investors by surprise. There has been widespread commentary with more to come as the detail unfolds.
- The bright-line test has been extended from 5 to 10 years for properties purchased on or after 27 March 2021
- The current exemption for the main home changes for properties acquired on or after 27 March 2021, making them subject to a ‘change of use’ rule
- From 1 October 2021 property owners will not be able to claim interest on residential investment property acquired on or after 27 March 2021, and interest deductions on borrowings for residential investment property acquired before 27 March 2021 will be phased out over the next four income years.
Different rules apply for different scenarios:
- For properties purchased from 27 March 2021, the bright-line test period is 10 years.
- If you already own a rental, and, the old rules apply:
- a 5-year bright-line test if you purchased the property on or after 29 March 2018, or
- a 2-year bright-line if you purchased the property from 1 October 2015.
- If it’s a new build, the proposal is that it will be subject to a 5 year bright-line test.
- If you’re in the middle of buying a residential rental property, it’s more complex. Generally, if you entered into a binding contract to purchase a property before 27 March, you are within the old rules and the 5-year bright-line test applies. However, depending on variables around when the offer is accepted or the exchange and timing of counter offers, the 10-year bright-line test may apply. Talk to us if you’re in doubt.
‘Change of use’ and the main home exemption
Under the current rules, if the property has been used as the person’s main home for over half of the relevant bright-line period, there is a complete exemption from tax under the bright-line test. Under the proposed changes, properties acquired on or after 27 March 2021 will be subject to a ‘change of use’ rule. If a property switches from being the owner’s main home for more than 12 months, then a proportion of the sale profits of a property sold during the bright line period will be taxed, based on the ratio of time that the property was and wasn’t used as the main home. The existing main home exemption rules continue to apply for residential property acquired on or after 29 March 2018 and before 27 March 2021.
The rules are graduated depending on when the property is acquired:
- for residential property acquired on or after 27 March 2021, taxpayers won’t be able to claim deductions for interest from 1 October 2021
- for properties acquired before 27 March 2021, interest on loans can still be claimed as an expense. From 1 October 2021 – 31 March 2023, the amount claimable will be reduced to 75%, reducing by 25% each following income year, until it is phased out completely from 1 April 2025.
The Government is also consulting on whether an exemption for new builds acquired as residential investment property should apply. Property developers and builders who build properties to sell will still be able to claim their interest expenses.
Residential properties used to provide short-stay accommodation, where the owner does not live in the property, will be subject to the bright-line test and cannot be excluded as business premises.
Some of the proposals are subject to consultation. If you have the opportunity to comment, please make it clear how the changes affect you. If you own a residential rental or one used for short-stay accommodation, or if you are considering buying a second property, please contact us, to discuss the tax implications.