Question from Rex updated on 30th November 2018:
I am the sole shareholder of an LTC which owns residential rental property. Soon this company is going to be making a profit rather than a loss. I intend to keep it in a profit situation in order to pay down debt on the property. Would you recommend changing the ownership to a trust? or something else?
Our expert Mark Withers responded:
The LAQC regime was scrapped in favour of the LTC regime to prevent taxpayers using losses at their personal tax rates but then retaining profits and being taxed at the lower company rate when losses became profits. The LTC regime therefore has the profits flowing out and being taxed in the same hands that utilised the losses.
Care must be taken if the LTC shareholding is altered as this triggers a deemed disposal of the underlying assets for tax purposes, this can include depreciation recovery and a re setting of the brightline test. Even though the property is still owned by the company the deemed disposal provisions can re-set the brightline.
There are also ongoing eligibility for LTC status issues to manage if a trust owns the shares. Remember also that the trust tax rate is 33% which is the same is the top personal tax rate so unless the income can be distributed to beneficiaries with lower tax rates the tax outcome may still be the same.
So, in my view, you may be best to leave the shareholding as is and accept the tax in your own name, or at least consider the wider implications before making a change.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.