Gift duty to be repealed – making gifting to your trust free!

The Government is considering repealing gift duty. Gift duty is a tax that you must pay when you give away more than $27,000 worth of property in one year. This may be by cash, forgiving a debt, transferring a house or other property to your trust. The original purpose of gift duty was stop people getting around the estate duty rules. The estate duty rules were abolished in 1992. Gift duty was retained to stop people giving away large assets to make themselves look poor to gain some benefit, for example, by minimising income tax liability or to get a more favourable result when applying for the residential care subsidy or to undermine the interests of creditors.

Most people avoid paying gift duty by setting up a gifting programme and only gifting the maximum amount each year before being required to pay gift duty ($27,000 per year). For example, an individual may sell their house to their family trust. The house is transferred out of the name of the individual and into the name of the trust. No money changes hands. Instead, there is a debt owed by the trust to the individual for the purchase price. The individual then forgives the debt by $27,000 per year until there is no debt left owing or forgives the balance owing in their will. The Government does not receive any gift duty but both the IRD and the individual incur substantial compliance costs. For example, if you get a lawyer to carry out your gifting you will pay about $300 per year in legal fees. That means if you transfer a $400,000 house to your trust and forgive $27,000 per year; over about 15 years you will pay at least $4,500 in legal fees to complete your gifting programme. Good for the lawyer. Not good for the client.

The Government is concerned about the effect repealing gift duty will have on creditors and access to social assistance. Also, there will be less incentive to gift assets to a trust when the top personal tax rate is the same as the trustee tax rate (as announced in the 2010 Budget). If gift duty is to be repealed it will be included in a tax bill due to be introduced in November 2010.

If you are planning to make a substantial gift or transfer property to your trust or to another person you may like to consider waiting until November to find out if gift duty is going to be repealed.