A. During the election campaign, the Labour Party promised to expand the “bright-line test” from two years to five years. The bright-line test imposes income tax on the sale of residential property bought and sold within a period where another land tax provision does not apply. The government have introduced legislation to facilitate this.
From a practical viewpoint, the main change in the legislation is that the word “two” in the current bright-line test is replaced with the word “five”. The other rules remain unchanged (for example the main home exemption).
The expansion in the bright-line test will only come into force when the Bill receives Royal Assent, most likely before 31 March 2018. As a result, the application of the bright-line test will depend on the date a property was acquired. In summary:
- Where an interest in the land was acquired prior to 1 October 2015, no bright-line test applicable;
- Where an interest in the land was acquired on or after 1 October 2015 but before the Bill receives royal assent, a two year bright-line test applicable; and
- Where an interest in the land was acquired on or after the Bill receives royal assent, a five-year bright-line test applicable
Please note that the above dates are not the same as the start date for the two and five year bright-line tests.
There are a few things to remember:
- You will only pay tax under the bright-line test if the property increases in value. If the property decreases in value, you will incur a loss, but this loss cannot be offset against non bright-line test income types.
- The bright-line test only applies where none of the other land taxing provisions apply. So, for example, if you bought a property with the purpose of resale, then you would be taxed under a different provision.
- The start date for the bright-line test can vary. This is largely dependent on the type of residential property purchased (for instance, apartment off-the-plans, an existing house).
- Extreme care needs to be taken around restructuring as in many situations, restructuring of private affairs can either crystallise a bright-line test obligation or trigger a new start date for a bright-line test obligation.
- Care needs to be taken around the “main home exemption” as specific criteria need to be met.
The expanded timeframe means that more care needs to be taken, especially around the restructuring of private affairs and around investing in residential property. We anticipate that under the expanded bright-line test, there will be more people unintentionally caught than before.