Establishing property holding companies

[Greenman]

I own several properties and all are held under the same Company name. What I'd like to do is establish several holding companies under the main company, so that each property is owned by its own individual limited liability company. And all of these companies would be wholly own by the existing main company.

In terms of transferring the property from "main Company" to it's new "holding Company", can I simply transfer it? Or do I need to do a S&P Agreement between the Companies (even though the ultimate ownership remains the same).

There aren't any mortgages over the properties, so no need to worry about notifying banks. I only need to consider LINZ and IRD.

[sbw]

Can I ask what is the purpose of this?
If you had 5 properties you'll have to set up 5 new companies (5x$160 = $800)
You'll have 5 new sale and purchases from the lawyer - maybe discounted but still at least $4,000+
You have depreciation recovered on all the properties when the are sold to the new entities... which could be a hell of a lot.

Unless you have a super good reason for re-structuring there is no point as far as I can see.

[Ivan McIntosh]

In my opinion you can transfer with the transfer price set out in the resolutions authorising the "sales", which will all be major transactions for the subsidiaries. Legal ownership does change, so it needs to be recorded one way or the other, but resolutions would be fine.

Another way to do it is for the holding company to subscribe for the subsidiary's shares in exchange for the property. That avoids any need to justify a transfer price because, being the subsidiary's only assets, the shares are self-evidently worth exactly what the property is worth.

[Ivan McIntosh]

Can I ask what is the purpose of this?
If you had 5 properties you'll have to set up 5 new companies (5x$160 = $800)
You'll have 5 new sale and purchases from the lawyer - maybe discounted but still at least $4,000+
You have depreciation recovered on all the properties when the are sold to the new entities... which could be a hell of a lot.

Unless you have a super good reason for re-structuring there is no point as far as I can see.

Good points, although I suspect the legal fees will be less than that because of the lack of mortgages.

Future damage limitation would be the most obvious reason, I would guess.

[sbw]

Future damage limitation would be the most obvious reason, I would guess

wouldn't you already have this having it structured in a company in the first place?

I'm just not a fan of complicated structures when nines times out of ten they aren't necessary.

[Ivan McIntosh]

Well, Greenman will be the one that knows, but if you wanted to use one property as security then you don't have the company giving a general security that covers all the properties when only one would do, as an example.....not that I generally disagree with what you are saying about over-complicated structures.

[Greenman]

Thanks

Thanks very much for your thoughts. Especially Ivan. The idea of the holding company subscribing for the subsidiary's shares in exchange for the property is simple and brilliant!

SBW - there's a very good reason for this structure. A few thousand dollars outlay now means many easy nights sleep in the future for me...

[Greenman]

Ivan - I was checking your company website. You may want to update this page:
calaw.co.nz/services-trusts

This information is now out of date:
Gifting programmes
The actual transfer of wealth into the trusts is effected by way of an annual gifting programme. It is also common for the annual gifting programme to fall behind in time. We place emphasis on this aspect and use computerised systems to ensure our clients' gifting programmes are kept up to date.

Our specialists in this area are Janet Jarman and Maureen Burton

[sbw]

Just checking... I know it probably came across as negative... but "some people" go into extremely complicated structures for no reason... being an accountant I see it all the time, and certainly increases compliance costs and the like ect. Sleepless nights are not fun! :P

[Ivan McIntosh]

Thanks Greenman....actually the whole website is out of date....it's about to be completely replaced, including that section.

One of the major problems was that the website developer did not make any client management software available, and wanted to charge what we felt were unreasonable fees for making even the most miniscule changes.

Regarding gift duty, you might be surprised by the number of people maintaining a regular $27k per year. A major reason is the rest home subsidy...despite the fact you can now gift much more in a year, there is no limit whatsoever to the time the authorities can look back and assess gifts over $27k/year as depriving yourself of assets...with consequent penalties.

[Rosco]

Regarding gift duty, you might be surprised by the number of people maintaining a regular $27k per year. A major reason is the rest home subsidy...despite the fact you can now gift much more in a year, there is no limit whatsoever to the time the authorities can look back and assess gifts over $27k/year as depriving yourself of assets...with consequent penalties.

Interesting.

- do you think rest home subsidies will be around in 10 years or more? I personally think they won't, but interested in yours and others thoughts.

- I was told that only 5% of people go into rest homes. So therefore 95% of people maintaining the $27k per year gift are doing it for no reason! Not 100% sure on this figure (came from investment advisor), and maybe someone else can confirm this?

- Isn't it $27,000 per year per couple? So most people who have been gifting for a number of years, might not be eligible for rest home subsidies anyway.

Ross

[One]

Mary Holm had a letter about this a few weeks ago from someone at the geriatric medicine group at the University of Auckland.

http://maryholm.com/heraldholm.php?article=590

The rates of use of residential aged care (RAC) at any one time are indeed a little under 6 per cent of the over 65s, and very related to age. In the 2006 Census, 1 per cent of those aged 65 to 74; 6 per cent of those 75 to 84; and 21 per cent of those over 85 were living in RAC. That also varies by gender, e.g. 29 per cent of women over 85 and 10 per cent of men over 85 were in RAC.

...

To find the proportion of people who "ever use" RAC we obtained information about where people die (from the Ministry of Health). Classification is tricky, but it seems that of all people over 65 who died in 2003 to 2007, 38 per cent died in RAC. This proportion rises from 17 per cent at 65 to 74, to 55 per cent at over 85.

Further, in the same period 34 per cent died in an acute hospital. If, say, one in four of these were admitted from RAC, more than 45 per cent will have used RAC in their lifetime.

[Ivan McIntosh]

Interesting.

- do you think rest home subsidies will be around in 10 years or more? I personally think they won't, but interested in yours and others thoughts.

- I was told that only 5% of people go into rest homes. So therefore 95% of people maintaining the $27k per year gift are doing it for no reason! Not 100% sure on this figure (came from investment advisor), and maybe someone else can confirm this?

- Isn't it $27,000 per year per couple? So most people who have been gifting for a number of years, might not be eligible for rest home subsidies anyway.

Ross

Really I've got no idea what the percentage is that ultimately go into homes. It is more about someone's perception of whether they might one day end up in a rest home....and some people are choosing to keep their options open.

There are other reasons of course for not gifting everything, such as having loan principal debt able to be paid back to get cash in the hand without incurring tax liability, or having a lever in terms of control of the trust and what it does.

I'm not talking a majority of clients. It is too early after the gift duty abolition to tell what kind of proportion will choose to keep gifting at $27k/year, but certainly more are doing so than I thought would be the case.

[spaceman]

..... to get cash in the hand without incurring tax liability.........

Maybe I've got the wrong end of the stick here, but what tax liability???????.

Surely with gift duty abolished the trust just gifts money back and there is no tax liability as the gift duty/tax has been abolished???

Cheers
Spaceman

[Ivan McIntosh]

Good point Spaceman....I do believe you are quite right.

A little bit of my thinking was stuck in the past there. Not to say you can't repay the debt, but of course there is that second option.