New Rules Regarding Disposal of Residential Property
“Bright-Line Test Extended to 5 Years”
In the Autumn Edition of our Law Report, Toni van Doorn in her article titled “The Bright-Line test – A warning for property investors” warned that the new government is considering a Tax Bill to extend the “bright-line test” out to a five (5) year period. The Labour-led government argued that the previous government did not go far enough to dampen property speculators and proceeded to introduce the Tax Bill to extend the test to five years. The Bill passed its third reading and became law from 29 March 2018.
From 29 March 2018, any financial gain from disposing of residential land within five years of acquiring it will be taxable. The exception to this rule is when the residential land purchased is or is intended to be the person’s main home (that term being defined in the legislation and referenced in Toni’s article).
Two-year rule or Five-year rule
Despite the test being extended to five years, not all existing contracts or disposals of land will be subject to the new five-year rule. Whether the two-year or five-year rule applies depends on when a person’s “first interest” in residential land is acquired. For a standard sale of residential land, a person acquires their “first interest” on the day they enter into an agreement to purchase the residential land. If a person acquires “first interest” or signs an agreement to purchase residential land on or after 29 March 2018, the five-year rule will apply if the person later chooses to dispose of the land. For any agreement to purchase standard residential land signed before 29 March 2018, the two-year rule will apply.
For standard residential land, the start date of the two-year or five-year rule is the date the title for the residential land is transferred to a person under the Land Transfer Act 1952 and the end date is the date the person signs an agreement to sell the land.
1. Person A signs an agreement to purchase residential land on 28 March 2018 and title was transferred to Person A on 1 April 2018. Person A decides to sell the land and signs an agreement to sell it on 2 April 2020. In this example, the two-year rule applies as Person A acquires “first-interest” in the residential land on 28 March 2018, which is before the two-year to five-year extension applies. The income Person A receives from the sale of the residential land is not taxable as it is more than two years after title was transferred to Person A.
Compare the above example to Person B who signs an agreement to purchase residential land on 29 March 2018. If title was transferred to Person B on 1 April 2018 and Person B signs an agreement to sell it also on 2 April 2020, the income received will be taxable. This is because Person B acquires “first-interest” in the residential land when the five year rule applies and as the property was sold within five years, any financial gain received will be taxable.
The above provided examples are for standard arms-length residential sale of property. It is important to note that the Bright-Line test imposes tax obligations on any disposal of residential property which may include instances that did not result in financial gain to the seller. Consequently, if you are unsure whether or how the Bright-Line rules apply, it is crucial that you obtain legal advice from us as early in the process as possible.