25 November 2022

In recent years it has become increasingly common for parents to help their adult children into home ownership in various ways, such as:

  1. lend or gift their children money to help the children buy a house
  2. buy a house and gift it to their children
  3. sell a house to their children at a reduced rate
  4. become co-owners in the house with the intention that over time the children will buy out the parents’ ownership interest.

Unfortunately, apart from scenario one, the other scenarios can result in an unexpected income tax bill for the parents if the transfer occurs in the brightline period, which is occurring more frequently now that the brightline period has been extended to 10 years.

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:

  • from a parent to their child unless the parents are nominees or bare trustees for their child with respect to the property being disposed
  • from a company, where the parents are shareholders, to their child
  • from parents, who are the trustees of a trust, to their child who is a beneficiary of the trust
  • from beneficiaries under a will, or intestacy, to a third party to the extent that the disposed interests are not their original shares acquired under a will, or intestacy
  • from one partner to themselves and their new partner, to the extent of the new partner’s share in the land and the disposal is not a transfer under a relationship property agreement, and a subsequent disposal of that property from the two partners to a third party.

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:

  • the disposal of residential property is from a deceased person to their executor or administrator
  • the disposal of residential property is from the executor or administrator to the beneficiaries under a will, or intestacy
  • the beneficiaries then dispose of that residential property to the other beneficiaries or to a third party (to the extent of the beneficiary’s original share in the land as acquired under the will, or intestacy).

What are your options?

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.

There is no ‘one answer’ to this situation as everyone’s circumstances and situations are different. It is therefore essential that you seek sound advice if you are looking to assist your children onto the property ladder or to transfer property to your partner – ideally before the sale and purchase agreement is signed, and definitely before settlement.

To discuss any concerns you may have about the brightline test, please contact your Nexia advisor.

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