No brightline rollover relief for trust resettlements

In amongst the myriad of changes to the brightline rules and rental property interest deductions in the current Tax Bill, some respite was expected in the form of rollover relief for residential property transferred between family entities.  

It was anticipated that resettling a trust property onto a new trust, or distributing the trust property back to the original settlor, would escape the clutches of the brightline rules and therefore not be taxable on any gain. 

The Supplementary Order Paper released earlier his month has however redrafted the proposed changes such that rollover relief will only apply to transfers of residential property from a trust to the principal settlor, and then only if the principal settlor had transferred the land to the trust in the first place. The rollover relief is limited in that it allows the settlor to use the trust’s acquisition date when determining the brightline period. 

Rollover relief will not be available where a trust is wound up and residential land is resettled on a new trust, even though this was recommended in the Official’s Report on the Bill. This means resettlements of residential land may give rise to income tax issues for the transferor trust if the resettlement is done within the brightline period, or for the transferee trust on subsequent sale within the brightline period. 

If you have been holding off resettling your trust until the legislation was passed, please get in touch with your Nexia advisor to discuss your options.