Setting up an LTC

Our Experts Answer:

Firstly, your structure will have no bearing on whether IRD will come knocking on your door, this is always possible! Secondly, bear in mind that our new Labour government promised in their published pre-election manifesto to remove the ability to offset tax losses against other income, ban negative gearing in effect.

To achieve this they will have to repeal the LTC legislation as this currently allows company losses to be flowed to the shareholders return. That said, IRD have signalled that it is acceptable tax planning to sell a previous home to a LTC and rearrange your affairs to take the equity to a new home, so I don't see any problem there.

I do have some reservations about doing this with the rental though, as this could simply be seen as tax avoidance designed solely to ratchet up your interest deduction. To be a legitimate restructure there must be genuine commercial reasons for the change. One possibility would be entering a matrimonial agreement to equalise the ownership with your wife and give effect to this by transferring the property to the jointly owned company. This would help validate the transaction but will ensure she gets 50% of the losses until the rules change. Remember also that the sale to the LTC will trigger depreciation recovery on the rental if you have any accumulated and it will also trigger and restart the two year bright line test clock that is shortly to become 5 years.