Ring Fencing

Rental loss offsets against other income may be gone!

There are new rules in the pipeline which will mean the “ring-fencing” of residential rental property losses will change. Please note that we have assumed for the purpose of this article that the current version of the draft tax legislation will be enacted without any changes.

If you have a loss-making residential rental property, then for most taxpayers the way in which losses are claimed has changed from 1 April 2019.

If you make losses on your rental property, you will no longer be able to offset these against your other income such as salary or wages, in order to reduce your overall tax liability. They instead will be carried forward to the next income year to be used against future rental profit or a taxable gain made on the sale.

These rules will apply on a portfolio basis, meaning that if you have more than one residential property, you can offset one property’s loss against another property’s profit. The profit will be calculated for the total portfolio and in the case of an overall loss, this will be carried forward.

Rather than using the portfolio approach, you do have the option to elect to apply the rules on a property-by-property basis.

As the main focus of these rules is to target residential investment properties, they will not apply to your main home. You will not be caught out by these rules if:

  • You have a boarder or rent out a room occasionally
  • If you have a holiday house that is sometimes rented out (it will continue to be subject to the mixed-use asset rules)

If you have more than one home, the one that you have the greatest connection to would be deemed your main home. If a home is owned by a family trust and is the main home of a beneficiary, this too will be excluded from the rules provided that a principal settlor of the trust does not have a different main home.

Rental residential properties owned by entities such as companies or trusts will be subject to special rules.

Please contact your local BDO adviser if you have any queries on the new ring fencing rules.