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Are You the ‘Family Bank’?

Are You the ‘Family Bank’?

Explore options for parents helping children buy a home. Understand gifts, loans, co-ownership, trusts, and tax implications. Contact us for advice.

The massive wealth shift from the baby boomer generation has started, and house ownership is the main focal point during the process.

NSW has the highest average house price in the nation, at $1,184,500. Canberra is next, at $948,500, followed by Victoria at $895,000. With the target cash rate forecast to continue at a 12-year high of 4.35% through 2024, emphasis is on parents and families to assist the younger generation in becoming homeowners.

Over the previous 15 years, house ownership has decreased from 70% to 67%. Declining house ownership will widen Australia’s wealth divide over time, since home ownership is an important component in wealth growth for many people. According to the Actuaries Institute, wealth disparity has increased dramatically during the 1980s, with the top 20% of families now having six times the disposable income of the bottom 20%. 

So, should you help your children purchase a home? Many parents would rather help their children while they are most in need than profit from an inheritance later in life. However, any help should not jeopardise your financial stability, which involves considering what assistance you can afford to offer.

The disadvantages of cash gifts
A monetary gift for a deposit or mortgage is a simple and practical way to help a family member. However, there are several drawbacks: 

  • Where the gift accounts for all or a considerable part of the deposit, lenders may want to guarantee that the loan is serviceable and may seek proof of the source of the money to confirm that the amount is not a loan and does not require payback (e.g., a gift letter). 
  • In the case of a divorce or separation, the gift may not directly benefit your kid but rather become part of the property pool to be shared. 

Gifts made from a family member out of genuine love and affection are often not taxable under the income tax code. 

The ‘bank of Mum & Dad’
If you give your child a loan to buy a property, be sure the conditions are recorded, ideally by a lawyer. 

Depending on your goals, there are many loan structures to choose from. For example, the loan could be structured similarly to a bank loan, with interest and regular payments, repayment required when the property is sold or ownership changes, and/or managed by your estate in the event of your death. 

Before lending big sums of money, you should consider what will happen in the event of a divorce, if your kid remortgages the property, if you die, if your child dies, if the relationship becomes strained, and so on. As usual, hope for the best while preparing for the worse. 

Providing security to lenders
A family guarantee may be used to partially or completely secure a loan. For example, some lenders allow you to utilise your security to contribute to your child’s deposit in order to avoid lender mortgage insurance (which varies from 1% to 5% of the loan amount). 

When you serve as a loan guarantor, you give security in the form of equity (cash or, more often, your property). In the event that your kid fails, you are liable for the sum promised. If you have secured your child’s debt against your property and do not have the funds or ability to repay it, your home will be sold. So consider the scenario seriously.

There are two possible formats for purchasing property with your children:

  • Joint tenants – the property is divided equally, and if you die, the other owner(s) inherits it regardless of your will.

  • Tenant-in-common – it is the most prevalent option since it allows for proportions other than 50:50 (70:30). If you die, your share will be divided in accordance with your will.

Regardless of ownership arrangement, if the property is mortgaged and the other party fails to repay the loan, you may become liable for the debt. This must be considered before making any borrowing agreements. 

Utilising a family trust
A more difficult alternative is to buy a property via a family trust in which you or a connected company serves as trustee. This method is often used for asset protection objectives. 

Typically, at some time in the future, you would transfer management of the trust to your child, and this may be doable without generating any CGT or stamp duty penalties, but this would need to be confirmed. 

When the house is eventually sold, CGT will apply to any rise in value, and the primary residence exemption cannot be used to decrease tax burden, even if the kid was living in the home. 

Be aware of state tax complexity. For example, in certain jurisdictions, holding property via a trust means that the tax-free land threshold does not apply, resulting in increased land tax burden. In addition, if the trust has any overseas beneficiaries, stamp duty rates may rise. 

Reduced or rent-free property.
Purchasing a home and enabling your kid to live in it rent-free or at a discounted rate allows you to provide a roof over their head, but it has no impact on your child’s ability to get a loan or utilise the property’s equity to develop their own wealth.

If you wish to consider your child’s home as an investment property and deduct all property-related costs, rent must be paid at market rates. If rent is lower than market rates, the ATO may limit or restrict deductions for losses and outgoings based on the discount granted. Any rental revenue received is taxable to you. 

In addition, CGT will be levied on any gain realised when the property is sold or ownership is transferred. If you want to leave this property to your kid in your estate, make sure your will is properly recorded to support this goal. 

Are you considering helping your children purchase a property or contributing to their home deposit? Feel free to discuss the options with Bates Cosgrave on (02) 9957 4033.