Following on from last month’s article, this month focuses on the exemptions applicable under the bright-line rules for relationship property, inherited property and the application of the main home exemption for property owned by trusts.

Main Home Exemption - Trusts

The main home exemption can also apply to properties owned by trusts in limited circumstances. For the main home exemption to apply to a trust, the property needs to have been the main home of a beneficiary of the trust. The principal settlor of the trust cannot have another main home.

A principal settlor is a person who has transferred the most value to the trust, so may not be the person who is recorded as settlor on the trust deed at the inception of the trust.

Basically, what this means is that the main home exemption is only available if the property sold is the main home of a person who is the principal settlor and also beneficiary. This most commonly causes problems when beneficiaries, ie children, utilise the trust property as their main home and it is the parents who are the principal settlors who have a different property as their main home.

Relationship Property

Unfortunately, it is common that some relationships, for whatever reason, do not stand the test of time and break down. When this happens, there is rollover relief available for property transferred between spouses or partners under a relationship property agreement or court order. This means that the bright-line rules will not apply to these transfers.

The main home exemption is only available if the [trust] property sold is the main home of a person who is the principal settlor and also beneficiary’

It is important to note, that any subsequent sale of the property, after the settlement of the relationship within the bright-line period, will still be taxable under the bright-line rules. It will be important to be mindful of this, especially if the financial circumstances of a person, despite taking ownership of a property under a relationship property agreement, have changed to the extent that they are unable to afford to hold the property past the original bright-line period.

Inherited Property

Rollover relief is available under the bright-line rules to the executor/ administrator of the estate, for all transfers of property after the death of a person.

There is also an exemption for executors/administrators and beneficiaries for the disposal of properties transferred to them on the death of a person.

Other Exemptions

There is also rollover relief available for land transferred within the bright-line period for companies that are amalgamating.

Now that the bright-line period has been extended from two to five years, it is likely that more taxpayers are going to be caught out as the characteristics of the land that they are holding change due to the passing of time, structuring choices, district plan changes or change in their personal circumstances.

In next month’s article we take a look at how the bright-line rules apply to serviced apartments.

In the meantime, if you have concerns on how the bright-line rules impact on you, feel free to contact Withers Tsang and talk to one of our experts.

Carole and her team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz