LTC share changes

Question from Raewyn updated on 13th April 2017:

Our rental properties are in a look through company (LTC)  company where my husband has 99% shares and I have 1% share holding. This is so we can write off any losses against my husband's income as he is the top wage earner.

However, my husband may stop working soon. This would make me the only income earner so it makes sense to for us to change the shares to me 99% and my husband to 1% . Can this be done ? Are there tax penalties for doing this ?

Our expert Nick Ashford responded:

It is certainly possible to alter the shareholding in an LTC. That said, the transaction you propose does have the feel of tax avoidance to it - ie: a transaction entered into primarily to alter the incidence of tax.

The chopping and changing of the shareholding simply to suit the changes in personal income may not find favour with IRD. This would be particularly true if the shares were effectively already joint matrimonial property.

Another test for tax avoidance is whether there is any genuine commercial reasoning for the transaction. There are also other traps with LTC companies when shares are transferred. These can include the deemed disposal of the property for depreciation recovery purposes.

If your husbands time out of work is only temporary it may be best to retain the existing structure and allow losses to be accumulated in his name. While they won't be available to generate any immediate refund the losses accumulate under his name and can be offset against his income when he derives one in the future.

Nick Ashford and the team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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