In April, new rules were introduced, limiting the ability to deduct interest and changing the brightline test. The impact of these rules differs significantly depending on whether a property is a new build or not.
These property tax changes were brought in with such speed and retroactive law that there wasn’t any chance to restructure around them, but it is important to understand the impact they have if you hold investment properties.
Any properties purchased on or after 27 March 2021 will be subject to a new 10 year brightline test, unless they meet the new build criteria which shortens the brightline period to 5 years.
Interest limitation rules
If you own rental property, these new interest limitation rules may apply to you, affecting how much interest you can claim when completing your tax return. Depending on when you purchased your rental property, the rules will affect you differently.
If you purchased your residential rental property on or after 27 March 2021, the interest paid on your loan is no longer a deductible expense from 1st October 2021 – unless it meets the new build criteria.
For property purchased before 27 March 2021, the government are slowly phasing out interest deductions over 4 years as per the below.
||Percentage of interest you can claim
1 April 2020 – 31 March 2021
1 April 2021 – 30 September 2021
1 October 2021 – 31 March 2022
1 April 2022 – 31 March 2023
1 April 2023 – 31 March 2024
1 April 2024 – 31 March 2025
1 April 2025 onwards
Interest deductions for any new loans on or after 27 March 2021 is not allowed from 1 October onwards.
Some residential accommodation is excluded from these new interest limitation rules, including land businesses, residential developments and new builds.
Also exempt from these rules are:
Your main home (if you earn income from this)
Your business premises
Certain accommodation providers
If you’ve recently refinanced or have a revolving credit, special rules will also apply.
What does this mean for your tax return?
You’ll need to consider the new interest limitation rules when you’re completing your income tax return from the 2022 income tax year onwards and check whether you’re eligible for an exemption.
New fields have been added to the returns form so you can provide information about your residential rental property interest expenses. These new fields will include the total interest, the interest expense claimed, and the reasons for claiming interest expenses.
If you sold a residential property that was taxed under the bright-line rule, you’ll also need to note this in your returns.
If you are planning on buying an investment property or making changes to your existing portfolio, you need to understand the impact of these changes and how they relate to different properties. Talk to us before you make changes that may have a negative impact on your tax position.
If you’re not sure whether these new rules apply to you, or you just want help filing your tax return in line with these changes, our expert accounting team can help. Give us a call on 0800 700 699, or email us at firstname.lastname@example.org to get started.