05 Mar The bank of mum and dad
Helping your children – with care
Contributions by family members to the purchase of a property and how this is recorded can affect property ownership. We discuss how you can help your children and, at the same time, lessen the risks to you as parents.
New Zealand houses have never been more unaffordable: in the 1950s to 1980s a house cost two to three times the average household income. In the 1990s it was four times the average, and by the 2000s it was up to six times the average household income. When you add in the fact that households are now far more likely to have two incomes (compared with the single income norm of the 1950s), housing looks even less affordable.
Parents are increasingly helping out
Unaffordability has led Kiwi families to get creative when it comes to purchasing and financing the purchase of real estate. Many parents have undertaken to:
• Gift money to children
• Lend their children money
• Lend the children money but then sign a gifting certificate to their child’s lender
• Buy a property with children (with or without the expectation they would live there), or
• Buy the property but the children pay all the outgoings, sometimes in lieu of rent, but often in the expectation that the property is ‘theirs’.
Put it in writing
All of these options add a layer of complexity to property ownership that, if not clearly agreed and recorded in writing, can cause problems later on.
One example is parents who jointly contribute to a multi-unit property with their child and that child’s partner. Both couples live in the property, but the parents do not have any interest recorded on the title to the property, nor any underlying documentation recording the arrangement. If the child’s relationship breaks down years later and the lender’s records from the joint purchase are long gone, the parents are very vulnerable to a claim by their child’s partner that the contribution was a gift – that the partner is entitled under relationship property law to an interest in one half of the property.
Another common example is where parents lend a young couple a capital sum to assist with the deposit on their first home on the understanding that it is a loan. However, nothing is recorded because the purchase can be more complicated if the lender knows the purchasers are borrowing money from more than once source. If the child’s relationship breaks down, the law assumes (in the absence of evidence to the contrary) that the money is a gift and the child’s partner may take the benefit of half of that gift.
Yes, it can seem unfair
The reason for these seemingly unfair outcomes is that the law creates a presumption that where a parent transfers money or property to a child then, in the absence of evidence to the contrary, the transfer will be presumed to be a gift.
This is of course directly opposite to the presumption in non-family circumstances, where a similar advance is presumed to be a loan.
Questions to ask yourselves
You need to be extremely careful when helping your children to purchase a home. If you’re thinking of helping your children to buy property, ask yourselves the following:
• Is the money a gift or a loan?
• Is interest payable?
• If it is a loan, when it is repayable? On death? On the sale of the home?
• Do you expect a share in the value of the home?
• What will happen if you want your money back?
• What will happen if the recipients are in a relationship or marriage and they separate?
It is critical that you, your child and their partner discuss and agree the basis for the advance, and that agreement is recorded in writing. If you don’t go through the process above, you all could be facing completely unexpected and distressing consequences.
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