We often get enquiries from potential clients about how parents can assist their children to buy property by giving them money, while at the same time protecting their contribution.
It can be difficult to choose the best structure under which the money should be advanced because each structure has flow on effects for both parties.
For example, some parents simply want to gift their child money. There are some pitfalls to consider however. The first is that once gifted the monies won’t be recoverable in the event that the parent wants the money back, for example in the context of a family law breakdown.
Further, gifting may affect a parent’s ability to obtain a pension.
Another way parents help their children purchase property is to advance them money in return for a legal interest in the property whereby the parent obtains a percentage share in the property proportionate to their contribution.
The main downside to this structure is that if the parent ever wants to transfer their share of the property to their child, stamp duty will be payable on the proportion of the property being transferred.
This also limits the child’s ability to do things like raise finance secured by the property without the parent being a party to the loan. From the perspective of the parent however, this structure is very secure.
The most common way in which parents help their children purchase property however is by way of a family loan agreement, usually secured by a mortgage.
There a number of advantages to this structure. Firstly, such an arrangement rebuts the presumption of advancement and removes any ambiguity as to whether or not the advance constitutes a gift.
Further, a loan agreement provides some protection in the family law context in the sense that the debt, if secured by way of mortgage, does not form part of the matrimonial pool of assets capable of division.
Depending on whether the mortgage is registered or unregistered, such a structure may also mean that upon a sale of the property the child has no option but to repay the debt which protects the parents’ contribution from being retained by a recalcitrant child and wasted if the property is disposed of.
There are some disadvantages to this arrangement as well however, including the fact that such a loan is deemed to be a financial asset for pension purposes.
There is no perfect fit and the right structure depends on the circumstances of each case. One thing you can be sure of however is that all of the parties need comprehensive legal and financial advice before entering into one of these types of arrangements.