The government has now passed legislation that extends the bright-line test from its original two years to five years. This means that before you consider selling any property within five years of purchase you should consider the effect of this law before you proceed.
Who does this legislation apply to?
This legislation applies to ALL vendors selling residential property within 5 years of purchase - irrespective of their intention at the time of purchase.
For sale and purchase agreements signed after 29 March 2018, this means that if an owner subsequently sells within five years, and the property is not their main home, then they will be taxed on any gain made on the sale.
For any properties purchased under agreements dated before 29 March 2018, then the previous two year timeframe applies.
Another important point under this law is that any vendor selling may only use the main home exemption twice within the 5 year period.
For a buyer:
Be aware of this legislation. If you are thinking about buying a house but don't plan to stay there long before moving on then talk to us or talk to your tax adviser first.
Be particularly wary of unplanned situations such as new relationships and blended families where you might decide to sell one party's house and combine households. This legislation could have an unintended effect.
For a seller:
It is important that we ascertain the following, as soon as you decide to sell your property. We will assess:
- How long have you owned the property for?
- Is this your main home?
- Is tax a concern?
Once these matters are established, we can seek accounting advice to understand and/or manage any risks of capital gains tax.
Vendors should also be aware of the importance of the date of disposal, which is the date the agreement for sale and purchase is signed, not the date the property is transferred. Once the agreement is signed within the five year time frame, vendors could be up for payment of tax.
Don't wait to understand this law
One of the challenges that we see as specialist property lawyers is that by the time we get involved in conversations with our clients they have already signed the agreement. The effect of this legislation needs to be understood by vendors BEFORE an agreement is signed.
If you are concerned that this law might affect you please take accounting and/or legal advice prior to entry into any agreement for sale and purchase. This will help you avoid any nasty surprises from Inland Revenue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.