One of Labour’s tax policies that it tabled before the election was to close tax loopholes relating to property investment. This was perceived to be the ability to offset losses from properties against other income.

This is on the basis that where property investors make persistent tax losses that indicates the expected (tax-free) capital gain is an important motivator to the investor. Allowing a tax deduction when costs relate, in part, to a tax-free capital gain could be seen as inappropriate.

Just prior to Easter IRD issued a paper on ring fencing rental losses and this looks to progress Labour's policy in this area.

For most people with residential property investments the proposals will have an impact with losses from properties no longer being able to be used against other income. The suggestion is that changes would apply for the 2019/2020 year onward, and would apply on a portfolio basis (across all properties), any losses from the portfolio would only be able to be utilised against profits from properties.

Interestingly the proposals only target residential properties and so do not apply to other types of properties (e.g. commercial properties for farmland)

Given that the tax working group is looking specifically at the taxation of capital gains it may mean these proposals quickly become redundant, however in the meantime they are likely to unsettle residential property investors and deter investment.

Our major criticism of the proposals are they do not recognise the lumpy nature of expenditure on residential property, by this we mean that the landlord may derive income over several years before being forced to undertake significant repairs and maintenance. The income in past years will have been taxed however under these proposals if the repairs and maintenance on the property result in a loss position, no tax deduction will be available until the property makes profits in the future. A more logical approach would be to limit today's losses to previous profits and ring fence the balance.

Submissions are due by 11 May 2018 and those affected would be well advised to get up to speed with the proposals and understand the impact it will have on their properties.