What does this mean?
Under the proposal, residential property investors will no longer be able to offset losses from their residential properties against their other income (for example, salary or wages, or business income), to reduce their income tax liability.
We understand that this change could have a significant impact on some property investors. It is proposed that ring-fencing of residential rental losses comes into effect for the 2019-20 financial year, i.e. from 1st April 2019. It is not yet passed into law so the exact final form of the rules are not yet known.
It is not yet decided exactly how this ring-fencing would be phased in. It will likely either be in full, from 1st April 2019, or progressively introduced over two or three years.
It is being suggested that the ring-fencing is to be applied on a portfolio basis, rather than property by property, which means that a taxpayer’s overall losses from residential rentals are ring-fenced and cannot be offset against other income. They will then be carried forward to be offset against any future taxable income from rental property. It is expected that there will be restrictions put in place on restructuring to avoid ring-fencing.
What should you do now?
Although none of this is certain yet, we feel that this represents an opportunity for property investors to take advantage of the present rules which allow offsetting of rental losses, at least until 31st March 2019. For example, if there is maintenance to be done in a loss-making portfolio, there could be benefits in doing this before 31st March 2019.
Capital improvements are, of course, not tax-deductible, so some thought should be given to whether particular expenditure will be beneficial from a tax point of view, i.e. whether it is genuine maintenance or capital expenditure.
In particular, with the upcoming requirement for rental houses to be insulated (by 1st July 2019) there is an argument that some insulation expenditure may be tax-deductible. This could depend on the extent to which it is replacement or first-time insulation.
Please get in touch with us so we can talk through what is best for you in your circumstance.
For full details, IRD have more information on their website