Legal

The Bank of Mum and Dad

By Debra Barron, Principal of ClearStone Legal

We recently heard of a case where $50,000 was lent by a parent to their child to help them with the deposit for the purchase of a property.  The mortgage broker provided a gifting certificate for the parent to sign to help with the mortgage application, but actually the arrangement was meant to be a loan not a gift.  Signing this certificate unfortunately set them up for failure when the relationship between the child and their partner broke down.  Even though there were text messages from the partner agreeing that it was a loan, when it came to the crunch they denied the loan and relied on the gifting certificate to avoid repaying the loan in the relationship split.

There are three ways to protect funds when trying to help your kids get a step up onto the property ladder. 

Don’t give them the money – make it a loan

We recommend entering into a loan agreement recording the terms of the advance and to secure repayment later on.  In order to get finance approved by the bank, the terms of the loan agreement will need to state that the loan is interest free, that there are no repayments during the term of the loan and that the loan can only be demanded for repayment when/if the property is sold.  A simple deed of acknowledgement of debt signed by both your child and their partner will secure repayment of the debt on the later sale of the property.

Gift the money conditional upon the parties entering into a Contracting Out Agreement

If you do want to make it a gift and have no expectation that it is ever to be repaid, but you want your gift to go to your child and not lose half of it in a relationship split, then your child and their partner could enter into a Contracting Out Agreement (also called a S21 Agreement or Property Relationship Agreement – of if you prefer the American term, a pre-nuptial agreement).  Such an agreement contracts out of the Property (Relationships) Act 1976 which would otherwise provide a presumption of 50/50 sharing of relationship property.  Often these agreements are entered into when one party to a relationship has significantly higher deposit to pay towards the purchase of a new home.  These agreements can be very narrow, and only deal with the deposit (i.e. all capital gains are shared equally notwithstanding the unequal contribution); or the agreement can be more complex and provide for more separate property such as kiwisaver, superannuation, business interests, income, other property, an interest in a family trust etc).

Jointly purchase the property with them

This requires all parties to be part of the finance application and be jointly and severally liable for the loans owing to the Bank.  You would need to own the property jointly in this arrangement for at least two years, assuming one or more parties will not be living in the property to avoid any capital gains tax – this is currently two years.  This can impact on the parents ability to raise new lending for their own endeavours and it’s a good idea to think about how you are going to exit this arrangement before going into it.  A property sharing agreement is recommended to cover how the outgoings will be paid, who can occupy the property, how the proceeds of sale will be divided on the sale of the property and how to give notice to end the arrangement.  This option is complex but not impossible.

Obtaining some advice at the outset can ensure there are no misunderstandings further down the track.  Give us a call on 09-973-5102 or make a time to come and see us at either our Kumeu or Te Atatu office.

New changes to the bright-line test

In 2015 the Government introduced the bright-line test. This requires income tax to be paid on gains from the sale of residential property under certain circumstances. Until recently, the bright line test was 10 years. This meant that if you purchased a property after 27 March 2021 and it was not your main home, you would attract capital gains tax if it was sold within 10 years (or 5 years for some new builds).

Government has now reduced the bright line test to 2 years starting on 1 July 2024. The change also means that you no longer have to separate out new builds from all other properties. 

In summary, from 1 July 2024, the bright-line test applies to the sale of any property within 2 years if that property is not your main home. If the property is your main home, you are exempt from the bright-line rule under the main home exemption unless:

• you have already used the main home exclusion twice over the 2-year bright-line period; or
• you have a regular pattern of either buying and selling or building and selling your main home (even if you or your family live in the property before it is sold).

We recommend that before buying or selling a property that you obtain advice on any bright line issues before signing any agreement. For more information on this or any other legal issues you can contact Kemp Barristers & Solicitors at info@kempsolicitors.co.nz or 09 412 6000.