CHANGING SHARES IN LTCS: CONSIDERATIONS

Changing shares in an LTC: what do you need to consider? Let’s say you’ve established good economic reasons for changing the shareholding in your LTC that owns rental residential property. You and your life partner are the shareholders. What do you need to check first, so you don’t get hit with a nasty, unexpected tax bill?

30-Second Overview

Even with good economic reasons, changing LTC shareholdings can trigger unexpected tax bills across three areas:

• Bright-line test: a shareholding change resets the bright-line clock(opens in new tab) for the portion transferred. Sell (or change shareholding again) within two years of that change, and the transferred percentage of any profit becomes taxable income for the person who “sold” the shares.
• Shareholders’ current account: if the LTC is insolvent, transferring shares can trigger a deemed disposal of shareholder debt, potentially creating taxable income if it exceeds the $50,000 de minimis threshold.
• Depreciable assets: if any asset costs over $200,000, and per-shareholder accumulated depreciation exceeds $50,000, there can also be tax consequences.

Bottom line: get advice before changing shareholdings. The tax angle alone isn’t a safe reason — and the mechanics of the change can carry real tax costs of their own.

 

 

Now that the summary’s out of the way, let’s get into the specifics.

Bright-Line Test

Any change in LTC shareholding resets the bright-line clock for the portion of ownership that changes hands. Sell the property, or change shareholding again, within two years of that change. The transferred percentage of any profit then becomes taxable income — for the person who “sold” those shares.

This applies regardless of when the LTC originally bought the property. It also doesn’t matter how long you’ve held your existing shares. It’s specifically the newly transferred portion that carries a fresh two-year clock, not the shares you already held.

Example 1: Alice and Robert each own 50 shares in an LTC with residential rental property (100 shares total). Robert transfers 10 shares to Alice. That starts the bright-line clock fresh for this extra 10% interest Alice has acquired. The property sells 1.5 years after the shareholding change. Alice needs to declare taxable income on this extra 10%. The formula: Sale Price minus Costs minus Purchase Price = Capital Gain. 10% of that capital gain becomes taxable income for Alice. The remaining 90% stays a non-taxable capital gain for the shareholders.

Example 2: Robert transfers 5 shares (of 100 total) to his son. He sells the property within two years of that change. So 5% of the sale profit counts as taxable income for Robert, the person who “sold” the shares. (Sale profit here means sale price less fees less original purchase price.) On a $100,000 gain, $5,000 becomes taxable income for Robert.

Shareholder Current Account (Worked Example)

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Depreciable Assets With Costs Over $200,000?

Does any of the LTC’s depreciable assets cost more than $200,000 each? If so, check next whether the accumulated depreciation on that asset, per shareholder, exceeds $50,000 — the “de minimis” threshold. If it does, there could be tax implications on transfer.

Quick Reference Table

Trigger	Threshold	Risk
Brightline	2-year window	Partial capital gain becomes taxable
Current account	$50,000 de minimis	Deemed income if LTC insolvent
Depreciable assets	$200,000 cost / $50,000 depreciation per shareholder	Possible tax on transfer

Key Takeaways

• Changing LTC shareholdings can trigger tax even when done for genuine economic reasons — the mechanics matter, not just the motive.
• Bright-line test: any shareholding change resets the clock for the portion transferred. Sell within two years of that change, and the transferred percentage of the capital gain becomes taxable income for the person who “sold” the shares.
• Shareholders’ current account: if the LTC is insolvent, transferring shares can trigger a deemed disposal of shareholder debt. This becomes taxable income if it exceeds the $50,000 de minimis threshold.
• Depreciable assets: watch for assets costing over $200,000 where per-shareholder accumulated depreciation exceeds $50,000 — this can also create tax consequences on transfer.
• To avoid nasty surprises, keep shareholder debt in proportion to shareholding going forward, and get advice before making any change.

What Next?

Getting the mechanics wrong here isn’t a minor slip — a bright-line trip-up or an insolvent current account can turn a sensible restructure into an unexpected five-figure tax bill.

Contact EpsomTax.com before you change any LTC shareholding. We’ll check the bright-line timing, the shareholders’ current account, and any depreciable assets against the $50,000 de minimis threshold — so you know exactly what a change will cost before you make it, not after. You may also want to read the related article, Are Tax Benefits a Good Reason to Change Company Shareholdings?

 

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* “de minimis” is a Latin expression meaning about minimal things, normally in the locutions de minimis noncurat praetor (“The praetor does not concern himself with trifles”) or de minimis noncurat lex (“The law does not concern itself with trifles”) a legal doctrine by which a court refuses to consider trifling matters.