Transferring shares in LTC

Thomas asks:
(updated on Friday, August 21st 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 Experts Answer:

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.

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