The Government’s announced law changes dealing with taxation of property came into effect on 1 October 2015 and will have a significant impact on all property owners who hold their family home in a trust.
The reason for this is that the exemption from providing tax information on the sale of main homes does not apply to residential homes owned or being bought by family trusts. This change could have a serious impact on people who own or wish to own their home in a family trust. Family trusts which do not carry on any taxable activity (like earning rental income) are unlikely to currently have an IRD number.
For all agreements for sale and purchase entered into after 1 October 2015, vendors who hold or purchasers who intend to purchase the property in a family trust will need to provide a tax statement to their lawyer (which includes the trust’s IRD number) before the property can be transferred and settlement takes place.
There are serious consequences for a vendor trust or purchaser trust if they are unable to settle on the agreed settlement date due to the lack of an IRD number. Agreements for sale and purchase set out these penalties in more detail however this usually includes paying penalty interest per day if settlement is delayed, often at a rate of 12-14% per annum.
IRD advise that an application for an IRD number is likely to take between 8 to 10 working days, however, they require certain information to be included with the application and it may take vendors and purchasers additional time to collate this information. Information required to be submitted with an IRD application include a copy of the trust deed, a copy of any deed of retirement and appointment of trustees if trustees have changed, and each of the trustees’ IRD numbers.
If you own or intend to purchase your home in a family trust we strongly recommend that you obtain an IRD number for your trust well in advance of buying or selling property to avoid the unnecessary stress and potential penalties that may result from not having a trust IRD number on settlement date.
Another consideration for family trusts is how the main home exclusion to the much publicised bright-line test will apply to trusts. Until this legislation is passed, we would recommend caution be applied if homeowners wish to transfer their existing family home into a trust, or else restructure ownership from one family trust to another, to avoid the possibility that after restructuring the family home will not satisfy all the requirements for the main home exclusion to apply.