The Government has proposed that ‘build-to-rent’ investors will get an exemption from the interest deductibility limitation rules provided they meet certain conditions.
The current interest limitation rules were introduced by the Government in March 2021. To ensure continued investment in new housing supply, new build properties were exempt from these rules for a period of 20 years.
Subject to legislation being passed, new and existing ‘build-to-rent’ developments will now also be exempt from the interest limitation rules, in perpetuity, from 1 October 2021. Subsequent owner(s) will be able deduct interest for as long as the asset is held and operated as a build-to-rent development.
Build-to-rent land will mean land, to the extent to which all the following requirements are satisfied:
- there are at least 20 dwellings in one or more buildings that comprise a single development, on either one title or multiple adjoining titles;
- those dwellings and any common land or facilities for those dwellings have a single owner;
- each dwelling is used, available for use or being restored or prepared for use as a dwelling to which the Residential Tenancies Act 1986 applies;
- all tenants are offered a fixed-term tenancy of at least 10 years with the ability to give 56 days’ notice of termination (but they may agree to or request other tenancy offers);
- explicit personalisation policies are offered, over and above the Residential Tenancies Act 1986.
A building that has build-to-rent dwellings can include other dwellings or commercial premises that do not form part of the build-to-rent development (for example, an apartment block that has shops on the ground floor). However, to the extent that any interest expense relates to that other land, the ordinary interest deduction rules in the Income Tax Act 2007 will need to be applied.
Land will need to continually meet the requirements of the “build-to-rent land” definition to qualify for the exemption. Even if land meets the requirements in the future, it will never be able to qualify again as “build-to-rent land” if at any point it has failed to meet that definition.
Existing build-to-rent assets
The policy is intended to apply to new and existing build-to-rent developments. However, it is highly unlikely any existing developments will have offered 10-year tenancies to all tenants. Existing build-to-rent assets will therefore have until 1 July 2023 to comply with the tenure and personalisation policy requirements included in the definition of “build-to-rent land”.
These changes are included in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill which was introduced on 8 September 2022.
There will be an opportunity to provide feedback on the proposal, including the proposed build-to-rent asset class definition when the bill is referred to the Finance and Expenditure Committee.
For more information about how this announcement may affect you, please contact Special Counsel Jo Giboney.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.