By David Hughes, Emile McPhee, and Paige Edwards – McCullough Robertson Lawyers
Australia is gripped by a well-publicised housing crisis, which disproportionately impacts first home buyers.
As a consequence, families with the ability to assist are increasingly exploring options to support their children to enter the property market.
Several strategies exist to achieve this, each with their own advantages and disadvantages.
Selecting a strategy requires a balancing of competing considerations, including asset and family wealth protection, potential tax implications, and other personal circumstances.
Some of the available strategies are outlined below.
Acting as a guarantor
Previously, one of the most common ways that parents assisted their children to buy property was by providing a guarantee to support their children’s bank loans. This was often (and still is) considered in circumstances where a parent has equity in property of their own but has limited available cash. While this strategy is still utilised in the current market, we are seeing less appetite for, and additional restrictions imposed by banks when accepting, this type of security to support otherwise uncertain loans.
Gift of money
Another common way that parents assist their children to purchase property is to provide a gift of money, with no expectation of repayment. In such circumstances, a bank will often require a declaration from the parents confirming the money provided was a gift and not a loan.
Care should be taken where either the parents or child receive a pension or other similar support, as the making or receiving of a gift could impact eligibility. There are also significant risks from a family law perspective which means that it is imperative that the child who receives the gift obtain specialist family law advice.
Loan
Increasingly, parents are stepping in and providing private loans to help their children purchase property. This strategy not only supports home ownership but also assists to safeguard family wealth in the event of family disputes or marital breakdown, noting family courts typically require all loans to be repaid before dividing the family assets.
To rebut the presumption of a gift, this arrangement must be properly documented as a loan.
Co-purchasing property
Parents may choose to co-purchase property with their child. While this can increase the borrowing capacity of their child, such arrangements can be complex and carry potential tax consequences. These arrangements can also expose the parent’s interest to family law or bankruptcy proceedings affecting the child (or vice versa).
It is essential to determine how ownership will be structured – in an entity such as a trust, or as joint tenants or tenants in common – and to understand the estate planning and tax consequences of that structure (e.g. the impact on availability of potential first home concessions, and capital gains tax implications for the parents).
Bare trustee
In some circumstances, parents buy property for their child with the intention that the child pays all costs and that there is an understanding that the parents hold the property for the child’s benefit. This may be done, for example, because the child is finding it difficult to obtaining finance to acquire the property.
This arrangement may be a form of trust known as a bare trust which ordinarily refers to an arrangement where a trustee holds property on behalf of the beneficial owners of the property, with minimal duties other than to transfer the trust property upon direction to the beneficiaries.
Key considerations
Helping children to enter the property market can be rewarding but it comes with complexities and may spark difficult conversations. Done incorrectly there is an enormous risk of adverse tax and asset protection consequences.
It is important to consider the various tax, financial, asset protection and estate planning consequences of each of the strategies outlined above, and to seek independent legal and tax advice in respect of any arrangements.
For the full version of this article with more detail on the pros and cons of each option, go to McCullough Robertson website.
McR Private can help you to understand the impacts of each arrangement and prepare formal documentation tailored to your family’s needs.
Upcoming event
McCullough Robertson is hosting in event at its Brisbane office on Wednesday, November 6, for its latest “Fast Five” seminar covering the five key issues that families and advisers should consider when assisting children to enter the property market. This will be followed by an opportunity to continue the discussion with the McR Private team over refreshments.
Presenters are:
- David Hughes, Partner, Tax
- Emile McPhee, Special Counsel, Real Estate and Finance
- Paige Edwards, Special Counsel, Estates
- Alex McCowan, Senior Associate, Estates; and
- welcoming Kate Alroe, special guest and Senior Associate from Lander & Rogers Family and Relationship Law team.
To register your interest, please contact Brittney Colbey at bcolbey@mccullough.com.au.
This article covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
