George and his partner Sam wanted to buy a house.
As it was their first home, they could use their KiwiSaver and they had each saved enough to have a reasonable deposit, especially now that prices had come down a bit.
George’s parents always said that they would help him out when he was looking to buy his first home in the same way they had helped his older sister, Eve, a few years previously.
George knew his parents had a trust and that the help to Eve had come via the trust. His parents’ lawyer was a trustee together with both his parents. George knew his parents owned their home and business through the trust and that the business had been doing well over the past few years.
He also knew that he was able to ask for more exact financial information under the new Trusts Act. But he also respected his parents and didn’t like to ask too many questions – even though Sam thought he should be asking more questions.
George’s parents said they had talked to their co-trustee and the trust was prepared to invest in the property with George and Sam.
They said that their co-trustee had recommended against making a gift directly to George as they wanted to ensure that any funds would ultimately be for the benefit of George only, if he and Sam split.
But they said that while the business was doing well, there wasn’t a lot of spare cash, and they did expect to get a return on investment. They couldn’t afford to simply give some cash to George in any event.
An option was to lend the funds to George and Sam. But to do that, the trust would have to sign a document to say to the bank that it wouldn’t charge any interest to George and Sam.
Without that document, the bank would treat the money from the trust as another loan that George and Sam had to pay and that would limit what they could borrow from the bank.
George’s parents thought they could have an unspoken agreement that if the house was sold, the trust would get its money back as well as a proportionate increase in value. However, the lawyer trustee pointed out that would be income to the trust and would be taxable in the hands of the trust.
The last option would be for the trust to own a share in the property. This came with its own complications. Firstly, the bank would require the trust to be a co-borrower on George and Sam’s lending.
The banking rules had changed over time, and it wasn’t like the “old days” when banks could lend to only one owner without the other owner having to be a borrower too.
Secondly, their trustee said that as the house wasn’t the trust’s primary place of residence, the trust’s share would be exposed to tax under the bright-line rules if the property was sold for a profit within ten years of the purchase.
It seemed that unless the trust was prepared to lend the funds without any interest payable, there was a possibility that tax would need to be paid on the increase in value.
The trustees decided to help on the basis that the title to the property would be in George and Sam’s names only, but there would be a separate document stating that George and Sam would be holding a percentage of the property “on trust” for the trust.
The trustees knew that this wouldn’t get around any bright-line tax, but it would mean that they wouldn’t need to be co-borrowers with the bank, and it would more accurately reflect the situation.
Even something as simple as helping a child into a property can have unintended tax consequences and it is always important to obtain tax advice.
DAVENPORTS LAW, 331 Rosedale Road, Level 1, Building 2, Albany, T: 09 883 3284, www.davenportslaw.co.nz
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