For many young people, property ownership seems like a distant and possibly unattainable dream. Understandably, many parents of young couples are increasingly motivated to provide financial assistance to help their children purchase their first home. Parents providing this sort of assistance, however, need to be mindful of the potential pitfalls that can be inherent in such arrangements. Depending on how the assistance is structured, such arrangements can give rise to unwanted tax and potential relationship property issues.
Gifting vs. Lending
Some children may find themselves in the envious position of having parents wishing to gift a deposit to purchase a first home. More often than not, however, parents prefer to make funds available through an interest-free or interest-bearing loan. Typically this is to ensure fairness between their other children and we will discuss how such loans may be accounted for under a parent’s Will below.
For some time now, Banks have been requiring that loans be included in children’s statements of financial position as a liability, this often causes their loan application to be declined. It has become, unfortunately, a reasonably common practice for parents to provide banks with “gift certificates” and then (with the assistance of their solicitors) enter into side agreements providing that the “gift” is in fact a loan. This ethically dubious arrangement is, however, quite unnecessary. We have found that in most circumstances the main registered Banks will accept parents lending to their children to fund their deposit provided that all repayment obligations to the parent are postponed until the bank has been repaid in full.
Documenting a loan in this way has several advantages. Firstly, parents and their lawyers are not providing false documentation to a Bank for the purposes of obtaining a mortgage. Secondly, in the event of a relationship breakdown between your child and their spouse, the spouse will not be able to raise the existence of a gift certificate to argue that, in fact, the advance received from their partner’s parents was not a loan, but a gift.
Another common arrangement is for parents to purchase a share of their child’s first home. Where this occurs, your lawyer should advise you of the benefits of a co-ownership agreement. A co-ownership agreement provides for responsibility for the various outgoings of the property and what process should be followed in the event either party wishes to exit the investment or carry out significant alterations to the property.
If the parents' investment in the child’s first home is intended as a “short-term” investment then both parents and children need to be wary of the application of the bright line test. If the parents' share of the child’s home is transferred back to the child during the 10-year bright-line test period tax may become payable by the parent on any deemed capital gain associated with the transfer. In addition, the bright line test period will be “reset” for that share of the property transferred back to the child.
While there has been some discussion in the media concerning potential amendments to the Tax Act to negate what many see as an unintended consequence such amendment to the legislation has not yet occurred. While this shouldn’t prevent parents from becoming co-owners together with their children, these tax consequences are something that both parent and child need to keep in mind.
Recording gifts and loans in your will
It is not uncommon for parents to wish to treat their children even-handily in terms of benefits provided to each child. Where parents make gifts or loans which are repayable “upon demand” (and there is no intention of making demand during the parent’s lifetime) it is not uncommon for parents to include reference to such loans in their Wills. The standard provision provides that any gift or loan (which has not been repaid) made to a child during the parents’ lifetime shall be charged against the share of the parent’s estate that that child receives upon the parent’s death.
If you are considering assisting a child of yours into a first home it is important to receive legal advice before doing so and ensure that the assistance is documented correctly and in a way that avoids unnecessary costs or exposure to risk.
The information contained in this article is necessarily of a generalised nature and is correct as at July 2023. Specific advice should be sought in relation to any particular situation.
Article written by Glen Low