Ring Fencing Rental Losses

A proposed new law will stop residential rental investors from offsetting rental property losses against their other income. If you have a loss-making rental investment, you need to know about this.

The new law will come into effect from 1 April 2019.

Current Situation

Currently, if you own a residential rental property and your expenses exceed your rental income, the resulting loss is offset against your other taxable income such as your salary. This reduces your total income and therefore your tax.

Generally, PAYE is calculated on your salary as if it is your only income. You then file a tax return including your rental loss and receive a tax refund. The refund helps cover the rental loss.

Proposed Situation

The law change will stop rental losses being offset against other income. Losses will only be able to be offset against other residential property profits in the current or future years.

The new rules will apply from the 2019/20 tax year, which starts on 1/4/19.

Exclusions

Rental losses from the following types of property will be excluded from the new rules and therefore can continue to be offset against other income:

• Land taxable on sale. This includes land purchased with the intention of resale or land purchased for a property development or building business.
  NB, this exemption only applies to land that will definitely be taxable on resale. E.g, it will not apply to land that may be subject to tax under the bright-line test as that is only taxable conditionally on the property being sold within five years.
• Holiday homes used for rental and private purposes. These properties are subject to a different set of rules called the mixed-use asset rules.
  Commercial property
  Business premises
  Farmland

Conclusion

If you are considering buying a residential rental investment, or already own one, and rely on the tax breaks to make it work, then the new rules will affect you.

Please contact me with any questions.