If you are an existing or potential property investor then the changes the new Government is proposing to make to the relevant tax legislation will be of interest.
After getting used to the current bright-line test it appears that further changes are likely, the aim being to further dampen “tax-free” property speculation and create a housing market that is more accessible to owner-occupiers, particularly first home buyers.
The current law has applied since 1 October 2015 and requires all landowners to provide information about their tax status for land transactions to the Government. The intention was to ensure residential property speculators paid tax on capital gains made from property held for a short term.
Specifically, the “bright-line” test means if you sell a house within two years of purchase then, unless there is an exception such as the property being your primary place of residence, then you would pay tax on any net gain resulting from the sale.
The Labour Party housing policy aims to extend the bright-line test from the current two years to five years. Within that time frame you are assumed to be holding the property for at least a partial purpose of capital gain.
With current rental income levels compared to capital values (known as the yield), being at unsustainable low levels, such an assumption would seem valid but will nevertheless be a bitter pill to swallow for investors who may wish (or need) to sell due to a genuine change in circumstance. Especially so if the treatment is asynchronous with any capital losses remaining non-deductible.
A further signalled change is to ring-fence rental income losses. Using rental losses to negate tax that would otherwise be payable on other income sources is also known as negative gearing. The introduction of a ring fence would mean that losses can only be used to offset future profits from that rental property.
The end to negative gearing is likely to be phased in over a five year period with loss deductibility reducing by 20% every year. The additional tax generated from the restriction will be used to help 600,000 families heat and insulate their homes.
Other possible changes will mean investors who have residential properties that are not well insulated or are damp and mouldy will need to rectify these issues to ensure they are able to remain landlords.
Any change to the bright-line test may have an impact in the event of a relationship separation. Under the current law a transfer due to a relationship property transaction will not normally incur an income tax assessment however if the property is then sold subsequently, but within two years of the original acquisition, then the recipient partner will be liable. Such eventualities must be carefully considered in any separation agreement, and an increase to five years will make this even more pertinent.
Even within a happy and stable relationship, a contracting out agreement with your partner or spouse dealing with sharing future tax liabilities may be a prudent course of action.
Remember, these changes only affect properties that aren’t being used as the primary place of residence.
So when will all this happen? The election promise from Labour is not to implement any tax changes until 2021.
For further information please contact Sarah Bee or your Saunders & Co advisor.