Langley Twigg Law Hawke's Bay

As you will have heard, gift duty has been officially repealed with effect from 1 October 2011.  Following on from our article in May, we now look into some existing regimes which may operate to allow creditors to claw gifts back. Claw back provisions exist in, for example, the Insolvency Act 2006, the Property Law Act 2007 and may operate to slow or invalidate gifting.

Under the Insolvency Act 2006 any gift made within two years of insolvency can be set aside.  Any gift made between 2 and 5 years from insolvency can also be set aside if the donor was unable to pay all of their debts at the time the gift was made.

Under the Property Law Act 2007 a gift can be set aside if it has the effect of prejudicing any creditor and the donor was either insolvent after the gift was made or did not have equity sufficient to cover reasonably foreseeable debts as they fall due after the gift was made.

It is important to note there is no time limit to the Property Law Act test. Also, the test takes into account all contingent liabilities such as guarantees that could be called up.

Some people in business will find that if they gift their house for no consideration and account for any guarantees and other debts then they do not have equity to pay  reasonably foreseeable debts as they fall due.

If there is any question as to solvency or ability to pay debts in the future then a solvency test should be carried out before any substantial gifting takes place. A solvency test will give a useful indication as to how much gifting can safely be done and will provide useful evidence if ever there is an attempt to claw a gift back.  

As always, there is safety in good administration and record keeping. Gifts should be properly documented so they withstand scrutiny in the future. Stricter compliance requirements around trusts and their financial activities are likely in the future.

Each person’s situation is unique and your lawyer can easily guide you through the issues before you forgive debts or gift away your assets.  Langley Twigg will be running a seminar on gifting on Thursday 29 September.  Please enquire for details.

By Nigel Loughnan