Ring-fencing 'may be just the beginning'

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Government moves to ring-fence holiday home rental losses should send a chill down the spine of residential property investors, says property tax specialist Mark Withers.

Friday, June 29th 2012, 12:00AM 4 Comments

by Susan Edmunds

Revenue Minister Peter Dunne has announced Government plans to ring-fence losses on holiday homes offered for rent if the gross income from the property is less than 2% of its land value.

This comes on top of the changes announced in the Budget, reducing the amount of tax deduction that can be claimed on baches, bringing it in line with the number of nights they are available for rent.

Mark Withers, of Withers Tsang and Co, consulted with the Inland Revenue Department on the proposed changes. 

He said this could be the thin end of the wedge and lead to ring-fencing losses on all property investments.

While property investors had not been very concerned by the changes relating to holiday homes, the ring-fencing proposition could be the start of a whole host of major changes across the industry, he said.

“Property investors have thought, ‘I haven’t got a bach, it doesn’t apply to me’. But if they ring-fence losses on baches, it could so easily be extended to property investment losses in general.”

He said this was the first time the Government had suggested limiting deductions in relation to the value of a property.

He said it would be a major concern for investors who had properties with, for example, a 4% yield funded by borrowing at 6%.

“It could so easily be applied to the wider investment market and if you’re sitting on a high-debt, low-yielding property relative to value, you’ll be absolutely stuck.”

Withers said once the precedent had been set, it would be easy for the Government to widen its sights.

“Once this law is on the books all they have to say is let’s widen it, the principle is already there. These are genuine losses, they shouldn’t be ring-fenced.”

Martin Evans, of the Independent Property Managers Association, agreed. “Everything the Government does is open to expansion.”

He said once the proposal was law, it would be much harder for anyone to make their objections heard. “They’ll negotiate on the first thing then they’ll just add to it. There’s not much you can do about it.”

The legislation is expected to be before the house in August or September. 

Withers said: “If people start to think about it they might think that this is not such a welcome change.”

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