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As forewarned in our previous tax publications, the government has now passed the law which will restrict the use of losses from residential property. These rules take effect from 1 April 2019, so apply from the current tax year.
The rules apply to ‘residential land’, using the same definition of ‘residential land’ already existing for the five-year bright-line test (basically, land zoned residential or used for residential purposes).
The rules apply by default on a ‘portfolio basis’, allowing investors to offset losses from one residential property against income from other properties the investor also holds. However, the investor can elect to apply the rules on a property-by-property basis (this could be useful if the investor holds some property which may be taxable on disposal).
Losses from residential rental properties will be ‘ring-fenced’, carried forward to future income years, and will only be able to be offset against:
If the property is held by a company, the usual losses carry forward rules (being 49% shareholder continuity) must also be met to allow unused residential rental losses to be carried forward.
There are anti-avoidance rules that apply if someone has an interest expense for money they borrow to provide funds to a 'residential land-rich entity', being an entity where more than 50% of the assets by value are residential land. Broadly, these loss ring-fencing rules apply to the interest deduction available to the owner of that land rich entity.
The following situations are not caught by the new rules:
These rules underwent substantial revision as they passed through the law-making process, and there are some added complexities that apply now to interposed entities and residential portfolios that are made up of both taxable and non-taxable residential properties.