landlord tax rules

PHOTO: Houses in Auckland – more needed. Photo credit: Getty

Landlords were taken aback earlier this week when the Government announced they would no longer be able to deduct interest payments from rental incomes to reduce their tax liability.

But it’s not a policy that’s come right out of the blue, having been phased in over the past four years in the UK.

“We drew on the experience of the United Kingdom – they’ve done the same thing, they applied it retrospectively, they did that over a few years,” Prime Minister Jacinda Ardern said on Tuesday, answering questions about the policy.

“We chose the four-year period.. in part because that’s the way in which the United Kingdom government did exactly the same thing,” Revenue Minister David Parker added.

But considering all the things New Zealand does better than the UK – our COVID-19 response perhaps being the most notable example – why would we copy something the Brits did?

The truth is, we’re not exactly.

“What the UK did is equivalent to going halfway to doing what New Zealand did,” Westpac chief economist Michael Gordon told Newshub.

The UK’s policy was introduced six years ago by then-Chancellor of the Exchequer George Osborne (the UK’s equivalent of our Finance Minister). It kicked in 2017, after he left office. That year, investors could only deduct 75 percent of their interest; from 2018, half; 2019, a quarter; and from last year, none at all.

Analysis published on the UK government’s website in early 2017 estimated only one-in-five landlords would be affected, mostly those with “above-average incomes”.

Effect on house prices

The effect on house prices was almost instantaneous. In the previous four years, the average price of a house in the UK had gone up an average 6.5 percent annually, according to propertydata.co.uk – from £174,592 to £224,719. The annual price change in mid-2016 was 8.2 percent; by June 2017 it was 4.9 percent, and in mid-2019 it had fallen to 0.6 percent – below inflation.

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