Transferring shares in LTC
Question from Thomas updated on 21st August 2020:
We have a rental property in a look through company (LTC) where my wife has 1% share holding and I have 99% shares holding. I am the top wage earner. Now, the rent nearly covers the interest of the mortgage. We want to change the share structure to 50:50, so that we can apply a bigger loan to buy another property. Will this incur any tax penalties?
Our expert Matthew Gilligan responded:
You need to be careful transferring shares in an LTC for a couple of reasons. First, the transfer of shares is deemed to be a transfer of the underlying assets of the company itself. This can trigger tax consequences if the underlying assets in question are property within the bright-line period, for example. Secondly, the IRD could view a restructure of shares as being motivated by tax benefits and therefore class it as tax avoidance.
That said, both these consequences are potentially avoided if the transfer to a 50/50 split is executed as part of a relationship property agreement. A relationship property agreement is not necessarily the domain of a couple entering into a relationship or who are separating. It can be executed by spouses in an ongoing relationship who wish to confirm the ownership of assets from a relationship property perspective. It does require involvement of lawyers, however, so you will need to bear this cost in mind.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.Search the Ask an Expert archive
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