IRD clarification on bright-line test application to family transactions. IRD have issued IS 23/02 regarding the application of the 5 year bright-line test to certain family and close relationship transactions involving residential land. The 5-year test in s CZ 39 applies to transactions entered between 29 March 2018 to 26 March 2021.

Specifically, the statement centres on applying the 5-year test to the following transactions:

  • parents to their child to assist the child with buying their first home
  • one partner to themselves and their new partner, and
  • all the beneficiaries who inherit the land under a will or rules of intestacy to some of the beneficiaries.

While there is no specific carve out to the rule for parent-to-child transactions, IRD have stated that a transfer from parents who are nominees or bare trustees for their child, is not a “disposal” for the purposes of s CZ 39. The criteria for such an arrangement is covered in the statement.

Where one person owns a bright-line property and later changes the ownership to include their partner, this will be treated as a transfer of half the property to the partner. However, s CZ 39 will not apply where there is settlement of relationship property under a Property (Relationships) Act 1976 relationship agreement or equivalent court order.

IRD have clarified that in the context of inherited property, the following transfers are not considered a “disposal” for the purposes of s CZ 39:

  • a disposal from a person who dies to an executor or administrator;
  • a disposal from an executor or administrator to the beneficiaries under a will or rules governing intestacy;
  • a disposal from some of the beneficiaries under a will or rules governing intestacy to the other beneficiaries; and
  • a disposal from beneficiaries under a will or rules governing intestacy to a third party to the extent of their original shares in the land acquired under the will or rules governing intestacy.

IRD is expected to issue a separate statement on the application of the new 10 year bright line and 5 year new build Brightline tests which apply to residential land acquired from 27 March 2021. This is intended to be released later in 2023 and expected to be largely consistent with the conclusions in IS 23/02.

Bright-line issues continue to cause a significant issue on these types of family transactions where sometime the ‘she’’ be right’ attitude is not the best approach. While the carve outs above do exist, they require quite specific circumstances and these need to put in place before transactions begin. As always, we recommend you contact one of the team when considering purchasing property particularly if this property might be disposed in the next 10-years.