Helping your kids buy a home? Don’t fall victim to this tax trap

With Labor clinching a resounding election victory, aspiring homebuyers have now been promised an increase in the thresholds for the government’s Help to Buy home buyers’ scheme. However, this program has not even begun operation, with no handouts expected until later this year.

The unfortunate reality seems to be that many young owners-to-be will still need to rely on the bank of mum and dad. But if parents go down this path, be careful not to take well-meaning advice to put your name on the deed to protect your interest.

If you’re helping your children buy a house, entering into a binding agreement with them could help you avoid a tax sting.Credit: Stocksy

This will mean that part of your child’s home will be exposed to capital gains tax (CGT), as your children can only cover their share with their main residence exemption.

If the bank forces you to put your name on the deed, immediately enter into a binding agreement to sell your share to your child within the next five years. Hopefully, by then their equity will be enough.

Transfer of assets between family members are calculated at market value for CGT purposes. The trick is that it is the market value when the contract to sell is entered into.

If you enter into the contract immediately, then the market value is the price originally paid for the house, so no capital gain. In fact, it will be a capital loss when legal fees and stamp duty are considered.

Further, your child, if living in the property, can cover your portion with their main residence exemption right from the start because the benefit of the property has already passed to them even if ownership of that portion hasn’t.

Having the parent’s name on the deed with the intention of transferring full ownership to the child in under five years should still be a last resort, as there will be additional stamp duty costs, legal costs and possible loss of first home owner concessions.

If the banks are not interfering, then consider just giving your child the extra money they need to reach a 20 per cent deposit. If you are worried about your gift becoming matrimonial property or available to the bankruptcy trustee, then document it as a loan, taking a second mortgage over the property, subordinate to the bank’s security.

What if you need to borrow the money to help your child buy a home? Avoid being a co-debtor on all the loan or putting your own home up as security for the whole loan. It is better to just borrow, secured against your own home, enough money to give your child the required deposit to avoid lenders’ mortgage insurance.

Minimise your exposure to a much smaller amount. Lenders’ mortgage insurance offers no value at all to the borrower. If the borrower defaults, the insurer pays the bank but then comes after the borrower to recover their costs.

There are two tests your children will need to pass before they can qualify for a loan. Excelling at one will not help if they do not meet the other test. They must pass both individually to qualify for a loan.

The two tests are sufficient deposit, a well-worn topic, and ability to repay – if your child does not earn enough to pass the ability to repay test, they will just not get a loan. If you have a good income, you may need to be a co-borrower to help them pass this test.

The trouble with becoming a co-borrower is that you are jointly and severally liable for the full amount of the loan. It may be better to borrow separately in your own name to give them such a big deposit that the loan is smaller, and so will be repayments, and they can meet the repay criteria.

Julia Hartman founded BAN TACS Accountants more than 30 years ago and is still passionate about all things tax.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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