The Government has confirmed that it will double the bright-line test, and the new rule will apply to property acquired on or after March 27th. Doubling the capital gains tax-esque bright-line test from five to ten years means that any gains on a residential property (that is not a family home) will be taxed if the property is sold within ten years of purchase.
Effectively a capital gains tax on investment property, the bright-line test will see profits from the sale of property within ten years of buying it be hit with a tax of up to 39 per cent.
Another big change for investors is the full removal of interest deductibility from investment properties. This means investors can’t offset the cost of the interest they pay on their mortgage against their tax bill.
· If you acquire residential property on or after March 27th 2021 and sell the property more than ten years after acquiring it (or five years for a new build), you will not pay tax under the bright-line test on any gain in value.
· If you sell the property within ten years of acquiring it (or five years for a new build), and it was your main home for the entire time you owned it, you will not pay tax under the bright-line test on any gain in value.
· If the property was your main home but was used for other purposes for more than 12 months during the time you owned it, you must pay income tax on the profit from the property's gain in value.
· If you sell the property within ten years of acquiring it (or five years for a new build), and it was never your main home for the entire time you owned it, you will pay tax under the bright-line test on any gain in value.
· Residential properties used to provide short-stay accommodation, where the owner does not live in the property, are subject to the bright-line test and can't be excluded as business premises.
· Other rules in the Income Tax Act 2007 that apply to speculators, land developers and dealers continue to apply (regardless of when the property was purchased). The bright-line tests potentially apply only if none of the other land sale rules apply.
· If you inherited the property, the property is not subject to a 5-year or 10-year bright-line test.
· If you didn't inherit the property, but it's been your main home for the entire time you owned it, the property is not subject to a 5-year or 10-year bright-line test.
· If you acquired your property before March 29th 2018, the property isn't subject to a 5-year or 10-year bright-line test.
· If you acquired your property before March 27th 2021, the property is subject to a 5-year bright-line test.
· If your property wasn't a new-build when you acquired it, the property is subject to a 10-year bright-line test.
