Finance – Banking on Mum and Dad

With property prices rising year-by-year it is getting even harder for first buyers to get onto the property ladder. 

Banks are also restricting the availability of finance due to new rules. To make matters worse, new rental rules regarding interest deductibility and the Brightline Test, along with the growth in property values, are leading to increases in rent putting more pressure on people’s budgets. 

As property values rise, some parents are looking at using parts of their properties, or equity in those properties, to help their children buy or build a first house.

The important thing to note here is that any land or residential property must be passed onto the children at market value. If you gift or sell property at cost to associated persons, you could be creating an income tax liability under the Income Tax Act 2007. The Act deems the person has received an amount equal to the market value at the time of disposal, creating a situation where a profit would be made on the disposition and therefore a tax liability.

The second trap that arises is if you co-own a property with your children, you may be bringing in the Brightline rules for the portion of the property that you own. The current rules state that any profit made on a property that is not your main residence, sold with 10 years of purchase, becomes taxable income. The children would have an exemption as they use the house as their principal place of residence. If the balance of the property is sold to the children within the 10 years (and the property has increased in value), the parents would have taxable income on the gain under the Brightline rules.

Should the children buy part of their parents’ share of the property, this could lead to income for the parents and also resets the Brightline test to another 10 years after the purchase.

Parents can loan money to their children to help them purchase a house and earn interest on that, which would be acceptable from the Inland Revenue Department’s point of view. However, this may be constrained by what is acceptable to the banks that loan money on the property.

Regarding changes to the Credit Contracts and Consumer Finance Act that came into force on December 1 last year, mortgages are getting harder to get as the banks require borrowers to provide more detail and evidence around their spending, as well as income, when they apply for loans. This becomes time consuming and effects new mortgages, top-ups and bridging finance. Banks now have reduced tolerance for expenses, unarranged overdrafts and missed payments – full applications are needed, no matter how small the loan may be. 

This has reportedly led to situations where loans have not been approved when people have spent minimal amounts of money at shops which the bank deem to be outside their tolerance levels.