Property investors to get slightly less tax relief than promised in National-Act coalition agreement
The Government has decided not to give residential property investors as much tax relief as National promised Act in the parties’ coalition agreement.
Rather than start phasing out the interest limitation rule in the current tax year, as stated in the agreement, it will start being phased out in the year to March 31, 2025.
The interest limitation rule prevents residential property investors from writing off mortgage interest as an expense when paying tax. Exclusions apply, including for new builds.
Under the existing law, introduced by the former Labour Government when the property market was overheating, no interest can be deducted for property bought from March 27, 2021.
For property bought before then, 50 per cent interest can be deducted in the current tax year, which winds up at the end of this month.
National and Act had agreed to allow investors to deduct 60 per cent of their interest in the current tax year.
Making this change would have been unorthodox, as it would have had a retrospective effect (applied to the past). Some investors would have received tax refunds.
It also would have meant the Government would not have received as much revenue as it was banking on getting.
This might have been particularly problematic in the current environment, with the sluggish economy seeing the Government collect less tax than forecast by Treasury. Indeed, Finance Minister Nicola Willis is already walking back from National’s pre-election commitment to return the books to surplus by 2026-27.
So the Government has decided to keep the rules as they are for the current tax year, then allow investors to write off 80 per cent of their mortgage interest in the year to March 2025, and all their interest in the year to March 2026.
Act leader and Associate Finance Minister David Seymour didn’t dwell on the fact he lost his battle with National on the matter, noting it was easier to avoid making a retrospective change. He didn’t mention what National might have given him to agree to deviate from the coalition agreement.
Rather, he focused on the positives for both investors and renters.
“Landlords have been hit with a double whammy of rising mortgage interest rates and increasing interest deductibility limitations during a cost-of-living crisis. These costs are inevitably passed on to tenants, one of the reasons New Zealand has all-time high rental costs,” Seymour said.
“Removing the ability for landlords to claim interest expenses made residential properties less attractive and reduced the pool of properties for tenants to choose from.”
An argument Labour made when it introduced the interest limitation rule was that it put investors on the same footing as owner-occupiers, who can’t deduct their mortgage interest as expenses to reduce their tax bills.
Investors hit back, saying that interest can normally be expensed in business, so preventing this in regard to a certain type of investment created inconsistency in the tax system.
Nonetheless, Labour’s finance spokesperson Barbara Edmonds accused the Government of abandoning first-home buyers, struggling to get ahead.
“The ripples of this decision will be felt for generations,” she said.
“Landlords will become tax cut millionaires, once again showing the Coalition Government’s priorities are a disgrace.”
Edmonds said the decision showed the priorities were “not lunches in schools, the smokefree generation or continuing the Cook Strait ferries” but “it’s mega landlords”.
“The assertion that this will bring the cost of rent down is a wolf in sheep’s clothing, there is nothing in today’s announcement that guarantees tenants will have savings passed on to them as a result,” Edmonds said.
“This tax advantage for the wealthy is not only set to be unfair for tenants, it shuts first home buyers out from getting a foot on the property ladder. Parents and grandparents who hope for their children to own their own home will realise it is a more difficult path to homeownership than ever before.”
The interest limitation rule change will be added to the Taxation (Annual Rates for 2023–24, Multinational Tax and Remedial Matters) Bill, which is currently before a select committee and is due to be passed before the end of the month.
Act had campaigned before the election on removing the interest limitation rule in one go, rather than phasing it out.
If it had its way, it would also have scrapped the bright-line test (a de facto capital gains tax on investment property), which will be reduced from 10 to two years from July 1.
“To overcome New Zealand’s many challenges there needs to be an environment where investment and development is encouraged. This [interest limitation rule] change is a step in the right direction,” Seymour said.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
House prices in Northern Ireland increased by 2.9 per cent to reach an average of £207,010 (€242,534) in the final quarter of last year, according to research from Ulster University.
The findings from the latest Northern Ireland Quarterly House Price Index show prices remained stable and continued to edge higher throughout 2023. This trend continued in the last three months of 2023 as the average house price increased by 0.4 per cent.
The research also shows signs of slowing market activity with transactions at their lowest level over the year, decreasing 26 per cent on the previous quarter.
“While the seasonal effects of Christmas and New Year traditionally see a slowing of market activity, a slight dip in buyer confidence remained in the last quarter of 2023 as the uncertainty of interest rates acted as a key factor for mortgage holders and prospective buyers alike,” the report noted.
“Encouragingly, the recent decision to keep the interest rate stable at 5.25 per cent is seemingly paving the way for more attractive mortgage deals.”
The data also shows minor declines in the cost of fixed, variable, and tracker rate mortgages during the final quarter of the year, indicating this trend could continue softening rates throughout 2024.
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“Lenders are motivated to build their loan books and attract customers, meaning that new borrowers or those remortgaging during 2024 may benefit from appealing deals and rates available,” the report said.
Separately, Northern Ireland has been named as the fastest-growing region in the UK for newly registered companies in 2023 in a new index from Ulster Bank and Beauhurst.
The boom in the number of start-ups was noted in the New Startup Index which found that Northern Ireland gained 14,000 new companies in 2023, which was a 59 per cent increase on 2022.
Belfast was hailed as the fastest-growing council area in the UK by number of newly registered companies, with a 123 per cent increase in the number of new businesses.
Causeway Coast and Glens, and Lisburn and Castlereagh also made the top 10 by growth in the number of companies incorporated, with the number of new businesses growing by 61 per cent and 54 per cent respectively since 2022.
The retail sector was responsible for the largest rise in the number of new businesses in Northern Ireland with 3,605 new companies set up.
Mark Crimmins, head of Ulster Bank, said: “These new ventures are predominantly small businesses, owned and run by local people, which will play an important role in supporting the growth of Northern Ireland’s economy.”
The rise in new businesses in Northern Ireland is a trend that is replicated across the UK. Some 900,000 new companies were incorporated in the UK in 2023, making it a record year for new businesses.
At a UK-level, the growth in female-founded businesses also continues to increase year on year, with a record 164,000 companies incorporated by women in 2023, up 4 per cent on 2022 and taking growth in the five years between 2019 and 2023 to 26 per cent overall.