If you’re thinking of buying property through a family trust it may prove helpful to know what this entails. A trust offers you an alternative to purchasing a property in your own name. While purchasing through a trust may offer more security than purchasing through a bank, other tax implications could cause this to be a less desirable option. Before making your decision, consider the pros and cons of buying a property through a trust.
The pros:
1. Lower interest rates
There are several ways to purchase a home through a family trust. For example, you could apply for home finance through the trust, or, if there’s enough capital readily available in the trust, you could loan this amount from the trust instead of through a financial institution. This would then be considered a cash offer and, depending on how the trust is managed, is likely to result in lower interest charges compared to a home loan.
2. The assets are protected
If, for example, you have your own business, then it’s safer to purchase the home in the trust’s name rather than have it registered in your name. In this scenario, if your business were to run into financial problems, the home cannot be liquidated as it’s not seen to be part of your assets.
3. Avoid estate & transfer duties
Buying property through a trust means that estate and transfer duty, as well as capital gains tax, can be avoided upon your death. If the home is registered to the trust, then the home will not form a part of the deceased estate and won’t be used in the calculation of estate duty. The beneficiaries of the trust simply inherit the home without incurring any additional costs as long as it remains within the trust.
The Cons
1. The trustees control the assets
Assets within any trust will no longer be owned by you and you would, therefore, lose sole control over them. The appointed trustees manage the assets by the terms and provisions of the trust deed. The trustees are often your attorney or accountant. However, you may also be able to appoint yourself and your spouse as the trustees.
2. High-income tax rate
If you’re planning on purchasing the home as a source of rental income, then it’s possibly better to finance the home through a bank to maximise profits. Any income received by a trust is taxed at the highest tax bracket at around 45% and will incur Capital Gains Tax (CGT) on any capital profit that it makes. To minimise this, the trust can distribute the rental profits to its beneficiaries who will then be taxed on this income according to their personal income brackets. However, no deductions will then apply as the usual non-capital expenses that can be used to offset against an individual’s rental income are all billed through the trust and not through the individual.
Seek financial guidance
Considering the pros and cons of buying property through a trust, we’d highly recommend reaching out to a professional financial adviser before you decide. While a trust can be a highly effective vehicle to manage assets, it may not suit everybody's needs. A financial adviser will be able to explain all the implications and assess whether it is the right move for you.
