HELPING YOUR CHILDREN GET INTO THE PROPERTY MARKET

SHOULD YOU BE THE 'BANK OF MUM & DAD'?

Many parents would rather help their children when they need it most, instead of waiting to leave an inheritance later. But it’s important to make sure that any help you give doesn’t put your own financial security at risk. This means you need to think carefully about how much support you can afford to provide.

Cash gifts

A cash gift towards a deposit or mortgage is a simple and effective method of helping a family member. For income tax purposes, gifts from a family member out of natural affection are not normally taxed.

However, there are a few downsides:

Where the gift forms all or a significant portion of the deposit, lenders may want to ensure that the loan is serviceable and may require verification of the source of the funds to ensure the amount is not a loan and does not require repayment.  You would need to write a letter stating that the money is a gift.

If your child were to divorce or separate from their partner then the gift may become part of the pool of property to be divided between your child and their partner.

Lending Money

If you provide a loan to your child to purchase a home, it’s essential that the terms of the loan are documented, preferably by a lawyer.

There are many ways to structure the loan depending on what you’re trying to achieve. For example, the loan could work like a regular bank loan with interest and monthly payments. It might need to be paid back when the property is sold or if the ownership changes. If you pass away, the loan could be handled by your estate—either counted as part of your estate’s value, subtracted from your child’s share, or forgiven.

There is a lot to think about before lending large amounts of money, like what should happen

in a divorce (yours or your child’s),

if your child remortgages the property,

if you die,

if your child dies,

if your relationship with your child becomes acrimonious, etc.

As always, hope for the best, and plan for the worst.

Providing security to lenders – acting as a guarantor

A family guarantee can be used to support a loan in part or in full. For example, some lenders allow you to use your own property as security to help your child with their deposit, so they don’t have to pay lender’s mortgage insurance. ( Lenders mortgage insurance is required if the deposit is less than 20% of the value of the property and it  can be between 1% and 5% of the loan.)

When you act as a guarantor for a loan, you use your property or savings as security. If your child can’t pay back the loan, you’ll be responsible for the amount they owe. If the loan is secured by your home and you can't afford to repay it, your home could be sold to cover the debt.

Before offering to be a guarantor for your child, you should think about how it will affect your own finances and future plans. Don't risk your retirement to your child’s aspirations. If you have more than one child, consider how to make sure the support you give is fair to everyone, perhaps it could be equalised in your will.

Co-ownership 

When buying property with your children, there are two main ways to own it:

Joint tenants – The property is shared equally, and if you pass away, the property automatically goes to the other owner(s), no matter what your will says.

Tenant-in-common – This is a more common choice, allowing different ownership shares, like 70:30. If you pass away, your share goes according to your will.

No matter which option you choose, if there’s a mortgage and the other person can’t pay, you might be responsible for the loan. So, it’s important to think about this before making any loan agreements.

You should also have a written agreement that explains how co-ownership works. For example, what happens if you need to sell your share? What if your children want to sell but you don’t? If one party wants to buy the other’s share, how will the property be valued? It’s common for children to think they only need to pay the original price to buy your share, but they may not account for taxes, stamp duty, or interest. Also, think about what happens if someone dies or if there’s a dispute.

If you don’t live in the property as your main home, you may have to pay capital gains tax (CGT) on any increase in the property’s value when you sell your share. This tax applies based on the market value, not the price you sell it for, and you won’t get the main residence tax exemption. Keep track of all costs related to the property, this may reduce the amount of CGT you’ll need to pay.

Using a family trust

A more complex option is buying property through a family trust, where you or a company you control manages the trust. This is often done for protecting assets. Eventually, you might transfer control of the trust to your child, and it could be possible to do this without triggering a big tax or stamp duty bill, but you’d need to check this first.

When the property is sold, you’ll have to pay capital gains tax (CGT) on any increase in its value. The main residence exemption won’t apply to reduce the tax, even if your child was living there.

Be careful about state taxes. In some areas, owning property through a trust could make you ineligible for tax-free land thresholds, leading to higher land taxes. Also, if the trust has any foreign beneficiaries, it could result in higher stamp duty costs.

Reduced or rent-free property

If you buy a house and let your child live there rent-free or at a reduced rent, it gives them a roof over their head, but it won’t help them get a loan or use the property’s value to build their own wealth.

If you want to treat the house as an investment property and claim tax deductions for its expenses, you must charge your child rent at market rates. If you charge below market rent, the tax office (ATO) may not allow you to claim full deductions for any losses or costs. Any rent you do receive is also taxable. Plus, if you sell or transfer the property, you’ll need to pay capital gains tax (CGT) on any increase in the property’s value.

If your goal is to leave the property to your child in your will, make sure your will clearly states this.

Monica Brooker