Latest NewsMortgage Help for the KidsWednesday, 25 January 2017

Avoid the pitfalls of helping the children with their first home.

The strategy To help the children buy their own home.

Surely it's not that hard? I could just give them money as a down-payment on their inheritance. You can either give the money to your child directly, or, if it suits them, contribute it to a First Home Saver Account where it can attract valuable tax concessions. These accounts attract a government contribution of 17 per cent on the first $5000 contributed each year and earnings are taxed at 15 per cent within the fund. Withdrawals are tax-free if used to purchase a home, though the downside is that you must keep the account for four financial years to attract the tax concessions. In its recent budget, the government made these accounts more flexible by allowing first home buyers to transfer the money to a mortgage when the account matures - if they have bought their first home within that four-year period.

However, the technical research manager at Centric Wealth, Anne-Marie Esler, says you can lose control or entitlement to it if things go wrong. A key concern is what happens if your child separates from his or her partner. Unfortunately your gift becomes joint property with your new "out-law" entitled to claim a share.

Is there a way I can ensure my child keeps the money? Centric suggests a couple of options. One is to lend the money to your child with a documented loan agreement. You'll need to get legal advice on the terms of the loan if you want to keep the money in the family if things go wrong. Even if you choose to make the loan interest-free, Esler says you can reserve the right to charge interest right from the original borrowing date. If your child's relationship ends, you can invoke the loan and require repayment. That will ensure your money is returned before the couple split their assets. But if all turns out well, you can always forgive the loan later.

Esler says another option is to recommend your child enter into a binding financial (or pre-nuptial) agreement, specifying how your loan or gift is to be dealt with if the couple do separate.

What if I buy the property? That would certainly protect you from any out-law issues and your child could live there for a reduced rent. However, Esler says you would be liable for tax on rent received and capital gains tax when you sell (plus stamp duty and other costs). If your child owned and lived in the property, no CGT would be payable.

Esler says an alternative is to buy the property jointly with your child. This has the advantage of boosting your child's ability to get and service a loan but CGT may still be payable on your share of the property when it is sold. Esler says parents should also be aware that they are 100 per cent liable if their child doesn't meet their loan obligations. This is also the case if you go guarantor on your child's mortgage.

Esler says if you receive, or plan to receive, the age pension within the next five years, you will also need to consider the social security implications. She says you are able to give away $10,000 in a financial year or $30,000 in any consecutive five years without affecting your pension entitlement but any amount in excess of this is assessed as a deprived asset in calculating your pension entitlements for five years. If you have a financial interest in the property, including a loan, this will also count as an asset in working out your pension entitlement.