5 Jun 2022
Thinking of helping your children onto the property ladder?
With house prices ever-climbing and the lending criteria being impacted by the Credit Contracts and Consumer Finance Act 2003, it is increasingly common for parents to find ways to help their adult children into home ownership.
Unfortunately, this can result in the parents having an unexpected income tax bill, especially with the bright-line period being extended from 5 years to 10 years.
BetterCo director Vinay Iswar has put together an informative article outlining the ways in which you can help your children into a home without those unexpected costs, including options such as gifting the house, selling the house at a discount, or becoming a co-owner.
Gifting the house:
If a house is gifted by the parents, or if a trust makes a distribution of a house to a beneficiary, for tax purposes the parent (or trust) is treated as having sold the house for market value at the time of transfer. If this transfer occurs within the brightline period, or if a sale of the house would have otherwise been subject to tax, the parent (or trust) can end up with a rather nasty income tax bill, despite having never received any cash for the transfer of the house.
Selling the house at a discount:
Similar to gifting a house, when a house is sold at a discount between associated parties (which includes parents selling to their children, or trusts selling to beneficiaries), the seller is treated as having sold the house for market value at the time of transfer. Again, if this sale happens within the brightline period, or if a sale of the house would have otherwise been subject to tax, the seller can end up paying income tax on a gain they didn’t receive.
Becoming a co-owner:
When a parent is a co-owner of a house with their children, and the children’s financial circumstances improve such that they wish to buy-out the parent’s share, this can again give rise to income tax for the parent on the share of the property transferred to the children if the transfer occurs within the brightline period. Regardless of the price at which the parent’s share is transferred, the parent is treated as having sold their interest in the house for market value at the time of transfer. The main home exemption will typically not apply to the parents, as the house will not be the parent’s main home, unless the parent and children are living together on the same property.
Proposed tax changes don’t go far enough:
Proposals are underway to correct unintended outcomes which can arise when there is a change in the proportions of ownership in a property, including when parents assist their children with the purchase of house and the house is subsequently transferred to the children. These proposals however do not go far enough to resolve the issues outlined above. The proposals simply clarify that, in a co-ownership situation, the share in the property that is transferred or sold may still be subject to income tax under the bright-line test, but the brightline period does not restart for the remaining ownership interests.
While future changes to the rules may occur, what are your options now if you are looking to help your children into a home? One option is that instead of becoming a co-owner of the house, parents could gift, or lend, a similar amount to their child so that the child is the sole owner of the house. Although, if the amount is treated as a loan, parents should check that the loan was not going to impact on your child’s borrowing ability with the bank. Another option is for the parents to consider being a guarantor of the child’s loan to purchase the house.
If parents do need to be co-owners of the house, it may be possible to document that the parents’ share of the house is held as nominee, or bare trustee, for their child. A subsequent change of ownership from the parent to the child would then not trigger the brightline test, as the full ownership of the property has always been with the child.
There is no ‘one answer’ to this situation as everyone’s circumstances and situations are different. It is however essential that you seek sound advice if you are looking to assist your children onto the property ladder - ideally before the sale and purchase agreement is signed, and definitely before settlement.