Home > Updates > How to help your children onto the property ladder without paying tax
In recent years it has become increasingly common for parents to help their adult children into home ownership in various ways, such as:
Inland Revenue has confirmed in a recent Exposure Draft that family transactions can be caught by the brightline test. In particular, a disposal of residential property within the relevant brightline period, in the following circumstances, can be taxable under the brightline test:
To calculate the taxable brightline income, if the property is disposed of below market value, the transaction will be treated as occurring at the market value. This means that taxable income can arise where a parent sells the residential property to their children at cost, or for an amount less than market value.
The existing exemption for inherited property remains. That is, the brightline test will not apply where:
One option is that instead of becoming a co-owner of the house, parents could gift or lend a similar amount of money to their child so that the child is the sole owner of the house.
Another option is for the parent to consider being a guarantor of the children’s loan to purchase the house.
If parents do need to be co-owners of the house, the parent’s share of the house should be documented as being held as nominee, or bare trustee, for their child. A subsequent change of ownership from the parent to the child would then not trigger the brightline test as the full ownership of the property has always been with the child.
For spouses and de facto partners, consider documenting any property transfers under a formal relationship property agreement so that rollover relief is applicable.
To discuss any concerns you may have about the brightline test, please contact your Nexia advisor.