Crystal Wealth Newsroom
Helping your children with an inheritance
“If you have the cash, be that from savings or an inheritance, there are four main ways you can structure it to help your children purchase property,” says Crystal Wealth’s Executive Director John McIlroy.
Option 1: Gift the money
In this scenario, the children could use the property as their principal residence, and they’d receive a capital gains tax exemption.
“There’s no gift tax in giving the money to your children in this scenario, and if the property they purchase is their principal residence there’d be no capital gains tax,” says John.
If the property is an investment asset rather than a primary residence, they could rent it out generate income and pay the expenses on the property.
There are some disadvantages to purchasing a property through gifted money, however.
“There’s little in the way of asset protection for either party,” says John. “You’ve gifted the money, so you no longer have any access to it. If your child was in a business that failed, there’s little protection. If one of the children had a marriage break up the property would be exposed and could be accessed by the Family Law Courts.”
Option 2: Loan the money
Another way of enabling your children to purchase property is to loan, rather than gift, the money.
Of course, this has to be done officially. While the loan could be interest-free, you should draw up a loan agreement and register a mortgage on the property with the Titles Office.
“If you took this route, the ownership would still sit with the children, just as it would if they took a mortgage through any other lender,” says John. “You have no gifting taxes, and no capital gains tax if it’s their principal residence.”
Loaning the money offers asset protection because theoretically the loan could be called in at any time, and also the children would be responsible for the property running and maintenance costs.
“You could also draft the agreement to enable you to call up interest if you needed to, even though the loan may be interest-free.”
In this scenario, it would only be the capital gains over and above the loan value that could be accessed by potential creditors or the Family Law Courts in the future.
The downside to this is the need to draft a loan agreement and register the mortgage – there’s a small cost to this but it’s not too significant.
Option 3: Buy the property yourself
Another option is to buy the property yourself and let your children live in it rent-free. Sounds simple, and it does offer asset protection for the children.
“If you own the property, then there’s no danger of it being caught up in any business or marital disputes,” says John.
However, there are downsides to this strategy.
There would be no asset protection for the parent if it was you who became involved in a business or marital dispute.
“Also, the children wouldn’t be eligible for the principal residence exemption, and you would be eligible to pay capital gains tax on any growth in the value of the property.
“You’d also be legally responsible for any costs associated with running and maintaining the property.”
Option 4: Purchase the property through a family trust
The fourth main option is to set up a family trust or trusts, gift or loan the money to the trust, and the trust buys the property. The main advantage of this option is that it can provide asset protection. If the property was rented there could be income tax advantages depending on the beneficiaries tax rates.
“While this is possible, it could be a complex way of doing it,” says John.
“There are ongoing costs, accounting costs and lodging tax returns, and also the children wouldn’t benefit from the principal residence tax exemption, either.”
If you need some expert help exploring options to help your children buy property, speak to one of our team today by calling 02 8599 1790, or email contact@crystalwealth.com.au.
Disclaimer:
The above information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.