Clarity at Last - How Taxation of Property Investment is Changing

October 5, 2021

If you’re invested in property, or are considering investing in property, chances are you’ve been wondering how exactly the changes to property investment taxation announced by the Government earlier this year might affect your decisions.

When the changes were announced back in March, they lacked a lot of detail and left everyone with a lot of questions. Including:

-         If new builds are exempt, what constitutes a new build?

-         How long does it remain new?

-         What happens when you sell your new build to someone else?

-         If you pay tax on the profit of that property, can you deduct your costs then?  

-         What happens if you want to move a property from your own name into your trust or company – would that trigger a re-start of the bright-line test period?

Much of that has now been clarified in the draft legislation recently released by the Government. It suggests that:

-         A new build is a property that received its Code Compliance Certification after 27th March 2020 (rather than 2021 as initially proposed)

-         It remains ‘new’ for tax purposes for 20 years

-         If you sell it to someone else within that 20 years, it remains new – so the ‘new’ status is transferable

-         If you lose the right to deduct interest costs on your property (because it doesn’t meet the definition of ‘new’) and you end up having to pay tax under the ‘bright line’ test when you sell it – you’ll be able to deduct those interest costs from the taxable profit at that point.

-         It also confirms that from April 2022, you’ll be able to move a property from your own name into a Trust or Look-Through Company within the applicable bright line period, without triggering the test and having to pay tax on any gain in the assessed value of the property.

So, what does all of that mean for you and your property investments or plans to invest?

-         If you bought a property off the plans in 2019, and it received its Code Compliance Certification after March 27th, 2020, your property passes the ‘new’ test.

-         Your new build remains new for 20 years, and because it retains that status through any on-selling, it would suggest that it may attract a premium over properties that don’t come with the tax advantages of being deemed ‘new’.

-         If your property isn’t considered new under the definition above, from the 1stof October your ability to claim the interest costs started being phased out and will continue to be over the next four years.

-         If your property isn’t considered new and you decide you want to sell it, if that sale then triggers the ‘bright line’ test and tax is payable on the profit, you will be able to deduct those interest costs from the taxable profit – but you’ll need to ensure you are keeping records to enable that.

-         If you’ve changed your mind as to what ownership structure you want to own your investment property, from April next year you’ll be able to make that transfer without re-starting the applicable ‘bright line’ test period.

The draft legislation still needs to go through the select committee process so is still subject to changes, but this is the best information currently available.

But even with changes possible, it’s reasonable to conclude that the rules increase the attractiveness of new builds as an investment option – which at enable.me we’ve always favoured for other reasons like lower deposit requirements, 10-year build guarantees, lower repairs and maintenance bills, and compliance with ‘healthy homes’ legislation.

If you’re interested in building your wealth through property, or want to review your current property investments, book an initial consultation with an enable.me financial coach here. If you’re already a client, contact your coach.

Hannah McQueen is a financial adviser, chartered accountant, author and the founder of enable.me - financial strategy & coaching

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