When helping your kids get into the property market can backfire

Parents can contribute funds to help their children buy a home or investment. But what happens, years down the track, when the child leaves a marriage or de facto relationship?

Peter McNamara wrote previously about the case where the courts found that a daughter held a one third beneficial interest in her unit on trust for her father: First-Home Buyers, stamp duty relief and parental loans that become gifts

Another concern for parents is that if their child separates from his or her spouse, the loan amount will become part of the pool of assets available to the separated spouse. Again, a formal signed loan agreement may provide some
protection to the parents, so that on separation, the parents can demand payment of the loan and accrued interest, and thus take the loan out of the asset pool available to the “in-law”.

Loan vs. Gift

The benefit of lending rather than gifting money to children is that it enables the lender to claw back the payment if the child’s relationship breaks down and the separated spouse of the child makes a claim for property adjustment of the benefit obtained from the parent.

The money provided by the parent to the child might however form part of the pool of assets available for property adjustment if the loan is characterised by the court as a gift. A gift may exist where loan repayments are never made, or where the original property purchased with the parent’s funds is sold and another property is purchased with the proceeds of sale, with no new loan agreement made.

“Loan” was just a gift from the husband’s parents.

This occurred in the case Barclay & Paston [2015] FCCA 744, where the de facto husband argued that monies totalling $200,000 and paid to him by his parents were a loan and thus ought to form part of the liabilities and be taken out of the shared pool. However, the court found that the monies were not a loan for “many reasons”, including:

There was no evidence: 

• of a loan agreement (oral or written) or of the terms of the loan;
• of whether the loan was repayable nor the circumstances in which the alleged loan would be repaid;
• that interest would be repayable;
• There had been no demand for repayment and after the husband sold various assets he had not sought to repay the alleged loans;
• When the husband made an application to the bank for a loan, he did not include the alleged loans to his parents on the application; and
• The husband did not tell the wife about the alleged loans.

The court found that the monies were a gift from the husband’s parents.

To read the full decision of Barclay & Paston [2015] FCCA 744 click here.

Loan, secured by a mortgage, was a loan.

By way of contrast, in Chaudhary v Chaudhary [2017] NSWCA 222, a mortgage between the lender and the borrowers that was signed and understood by both recipients, the husband and the wife, and secured by a mortgage, was recognised as a loan. 

The lesson is, before contributing to your children’s investments in any significant way, get advice and record the agreement in writing. To record your family loan agreement, contact Peter McNamara.

To read the full decision of Chaudhary v Chaudhary [2017] NSWCA 222 click here.