Earlier this year the Government announced a host of changes to combat a rapidly increasing housing problem. Below are some of the changes that have been made.
The bright-line test is a way to tax the financial gains people make when they buy and sell a house for income. This law isn’t new, it was introduced in October 2015. Originally a property acquired between 1 October 2015 - 28 March 2018, and then sold within 2-years of purchase was subject to the bright line rules. The rules were then tweaked again and if a property was acquired between 29 March 2018 - 26 March 2021, the bright line test was 5 years.
As of 27th March 2021, if an existing dwelling is purchased, the bright line test has now been extended to 10 years.
The Government has indicated that new builds will continue to be subject to a 5 year bright-line period. Before this can be legislated, what is considered a 'new build’ is still to be consulted on. The Government intends for the legislation to be retrospective so that new builds acquired on or after 27 March 2021 will continue to be subject to a 5-year bright-line period.
EXEMPTIONS TO THE BRIGHT-LINE TEST
The Bright-line test generally does not apply to your main home. However, the rules can be complex depending on the amount of time you have lived in the property and these rules have changed over time so that part of the sale price could be taxable if you were away from the property for a period of time.
SELLING RESIDENTIAL PROPERTY AFTER THE BRIGHT-LINE TEST ENDS
The bright-line property rule does not apply if you sell a property outside the applicable bright-line period. But other property sale rules will still apply if you:
The Government intends to limit the ability to deduct interest to make residential properties a less attractive investment option. The proposal is that, from 1 October 2021, interest will not be deductible for residential property acquired on or after 27 March 2021. For properties acquired before 27 March 2021, generally investors’ ability to deduct interest will be phased out between 1 October 2021 and 31 March 2025. Some properties are excluded from these rules and some exemptions are proposed.
Phasing out of interest deductions for properties acquired before 27 March 2021 is detailed below:
| Date interest incurred
||Percentage of the interest that can be claimed
|1 April 2020 to 31 March 2021
|1 April 2021 to 30 September 2021
|1 October 2021 to 31 March 2022
|1 April 2022 to 31 March 2023
|1 April 2023 to 31 March 2024
|1 April 2024 to 31 March 2025
EXEMPTIONS FOR NEW BUILDS
A new build will generally be defined as a residence that receives a Code of Compliance Certificate confirming the residence was added to the land on or after 27 March 2020.
If you convert an existing dwelling into multiple new dwellings, this can qualify as a new build, so too can converting a commercial building into residential dwellings.
This exemption will apply for 20 years and will be transferable to subsequent owners.
It is obvious that the Government is pushing Landlords into constructing new dwellings as rental properties, as opposed to purchasing existing properties.
Care also needs to be taken when changing ownership of properties, and refinancing loans, as this could have unintended tax consequences.
If you are thinking about investing in property or you are already a Landlord and you are not sure what implications of this might have on you, please contact the team at Malloch McClean if you need advice in these areas.
Disclaimer: The above information is a summary only of the new rules. The rules are complex and specialist advice is always required
before making property or financing decisions.
Written by Campbell Hay