Ring-Fencing of Rental Losses

From the 2019/2020 income year onward, new rules apply to deductions claimed for residential rental properties. Expenses related to residential rental properties are now ring-fenced meaning that they can only be used to offset rental income from the residential property. This means you will no longer be able to offset your rental losses against other income earned, such as salary and wages or business income, which would reduce your tax liability. Any excess deductions, in other words any losses from rental properties, at the end of the year can only be carried forward to offset against any future years rental profits.

The ring-fencing rules can be applied on a portfolio basis or property-by-property basis. The portfolio basis groups all of your rental properties into one portfolio allowing all expenses to be offset against the income earned from all properties with any excess deductions being carried forward to future years. The property-by-property basis treats each property individually and each could have carried forward excess deductions. It is possible to have a combination of portfolio and property-by-property basis rentals.

In the event that you sell the property and this is not taxed, any excess deductions at that point continue to carry forward and can only be used to offset any rental profits you may have in future years. In the event that the sale of the property is taxable, for example within the 2 or 5 year brightline rules, any excess deductions after the sale proceeds are accounted for can be offset against other income such as salary or wages if you used the property-by-property basis for the property or the property was part of a portfolio and all of the portfolio properties have been sold and all of the sales were taxed.

Some residential properties are excluded from these new rules including main homes, employee accommodation (particularly relevant for farming clients), farmland, property used mainly as business premises and property falling under the mixed-use asset rules.

Please keep in mind that if you have previously had losses from residential rentals offsetting other income, you may find that you have a tax liability or much lower refund than usual in the 2019/2020 year. As such, you may want to look at getting your records in early this year so you can assess the impact sooner.

We will discuss these changes with you at your 2020 accounts interview where relevant or if you have any concerns or queries in relation to these rules please contact your client manager.