The Bank of Mum and Dad - Gifting Money vs. Family Loans

Providing financial assistance to your adult children is one of the top 5 goals we regularly discuss with clients.  There are many layers to consider in these circumstances.  When it comes to helping out your children financially, there are two main options: gifting money or providing a family loan. Each approach has its own set of advantages and disadvantages, and it's important to understand these before making a decision.

Gifting Money

Advantages:

• No Gifting Tax: Generally, there is no gifting tax in Australia, although you might be subject to capital gains tax if you gift an asset like a house.

• Simplicity: Gifting money is straightforward and doesn't involve the complexities of setting up a loan.

• Mortgage Impact: A gift typically doesn't affect the amount a bank will lend your child for a mortgage.

Considerations:

• Asset Protection: If your child goes through a separation, there is usually no protection for the gifted assets.

• Pension Limits: If you receive the Age Pension, there are limits on how much you can gift without affecting your pension. It’s imperative you seek advice to ensure you do not harm your own financial situation.

• Entitlement Issues: It may sound harsh but some children may “expect” continual help in future.

• Independence: Conversely some children may prefer independence and be insulted by a gift.

Family Loans

Advantages:

• Asset Protection: A family loan can protect family assets in the event of a relationship breakdown.

• Financial Lessons: A loan may teach your child valuable lessons about saving,  and the value of money.

• Credit Score: A well-structured family loan may improve your child's credit score.

• Earning Potential: If you choose to charge interest then you may create an income stream.

Disadvantages:

• Bank Obligations: Banks may consider the family loan as a liability when determining how much your child can borrow.

• Pension Impact: Family loans can affect your pension entitlements, as Centrelink views them as investments.

• Income Reporting: If you charge interest, you may need to report it as income and therefore need assistance at tax time.

Structuring the Gift

A gift can be structured like an early inheritance, meaning there's no need to pay it back. However, it's important to ensure fairness among all family members and to document the gift in your will to avoid any misunderstandings.

Structuring a Family Loan

When setting up a family loan, consider the following options:

1. Ongoing Repayments: Decide whether there will be regular payments or a lump sum payment at the end, and whether interest will be charged.

2. Lump Sum Repayments: Your child might choose to repay the loan in a lump sum under certain circumstances, such as remortgaging or receiving a large sum of money from another source.

3. Win-Win Loans: You can provide a substantial loan with flexible terms, potentially earning a higher interest rate than a savings account while offering your child a lower rate than a bank would charge.

Each situation will be unique and therefore planning represents an opportunity to be prepared.  We are happy to discuss your situation and help you to assess the right way to provide financial assistance to your loved ones.  Get in touch.

General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.