Question from James updated on 10th July 2017:
I have three rental properties in my wife and I's name. They were all purchased in the last four years, two in the last six months. All have mortgages and the collective rent covers the mortgage and so far all other costs.
My intention is to sell one property after two years from purchase to reap capital gains and reduce the mortgage on the two remaining properties. But I am concerned about tax. I am earning in the upper tax bracket already and my wife is a stay at home mum.
What is the best option for me? Do I need to form a Trust or a company or should I simply put everything in my wife's name?
Our expert Nick Ashford responded:
There’s a bundle of issues here. Firstly, if a property was acquired with an intention to sell it to make a gain two years on, this gain is taxable under the intent provisions in CB6 and is not a capital gain.
The status of a company will also determine the taxing outcomes. It could be a standard closed company, a look through company (LTC) or a qualifying company (QC). Both closed and qualifying companies can distribute salaries to working shareholders, which may offer some flexibility depending on who does what.
Closed and QC companies can also retain profits and take advantage of the lower 28% corporate tax rate - provided the profits remain in the company and are not distributed. LTCs cannot retain profits nor allocate salaries so you simply have to flow the profits to the shareholders in accordance with shareholding.
Be very careful before you go changing the ownership of properties. If the company is a closed company any gain it makes by selling a property to a related party is a tainted gain which is fully taxable to the shareholders when distributed, even on windup. Trusts are a good option for profitable properties because trustees have the flexibility to distribute income to beneficiaries or retain profits.
The new bright line test of sale within two years, tax avoidance rules and the tainted gain issue above will all need to be considered before you attempt any restructure. Tread carefully.
Nick Ashford and the team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.