Transitioning to an LTC
Question from Arthur updated on 25th November 2019:
I have two properties, both of which are owned jointly with my wife. The first is a rental purchased in August 2014: it has a current value of $600,000 and a remaining mortgage of $200,000. The second is our family home which was purchased in October 2013: it has a current value of $800,000 and is mortgage free.
We are planning to buy a new family home worth $1.1 million and then rent out our current home. Note that I am the main income earner as my wife looks after the kids. My offer has been accepted but I am wondering if I set up a Look Through Company (LTC), with 100% shares in my name, and purchase the two properties which would free up equity to buy new home jointly with my wife?
If so, do I need to set the company up now when the agreement becomes unconditional or at the settlement date – ie: do I have time to get more advice before the settlement date? Do you see ring fencing going ahead and how should this impact my decision? I was thinking of setting it up as interest only but I’m not sure if this makes sense with ring fencing.
Our expert Matthew Gilligan responded:
Subject to a couple of provisos, you are right to think you are best served transferring your existing two properties into an LTC when buying your new home. Transferring the properties to the LTC and acquiring the new home in a trust (ideally), works well from both asset protection and tax perspectives. You sell the two properties at the total market value of $1.4 million and the LTC is borrower on both the existing $200,000 bank debt and the $1.1 million required to buy the new home. You do not need to set the company up prior to going unconditional but should set up well in advance of settlement.
Now the provisos. The sale of the properties into the company can trigger income tax consequences if the properties have been tainted through past property dealing activity, subdivision, development, or even rezoning. These issues need to be examined before you transfer them into the company. Additionally, the company then acquires the properties afresh, meaning there is a reset five-year bright-line period for the two existing properties (ie: if the company sells within five years you would have a taxable sale).
I see ring-fencing going ahead from 1 April 2019, but it would not dissuade me from recommending the above. Although you may not derive the same benefit in a ring-fencing environment, you still get benefits from asset protection and tax perspectives. There are further intricacies in terms of splitting your borrowing between two banks, which I’m unable to address here. For that, you should seek specific advice.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.