It is increasingly common for parents to provide financial support to their children, for example advancing them a sum of money towards the purchase of a home. If you choose to advance a sum to your child, it is crucial to document whether the sum advanced is a gift, a loan, or in exchange for something, for example an interest in a property that is purchased with the money. Failing to record clearly in writing how the sum should be treated can have expensive ramifications.
The law presumes that a sum advanced by a parent to a child, including an adult child, is intended to be a gift unless there is evidence to establish otherwise. This is called the “presumption of advancement”.
The issue of whether an advance from a parent to an adult child was a gift, a loan, or a part purchase in a property has had to be considered several times by the Courts. It can be an expensive and stressful process.
Disputes about the nature of a sum advanced to a child commonly arise during a relationship property dispute when a child separates from their spouse or partner. In one such case, a couple, Ms L and Mr Z, received a substantial sum from Ms L’s parents to purchase a home. When the couple separated, a dispute arose regarding whether the money was a gift or a loan. Mr Z argued that the money from Ms L’s parents was a gift and was therefore relationship property to be shared by them equally. Ms L argued that it was a loan. After hearing the evidence, the Court decided that the money was an interest-free loan to be repaid on demand. The sum was a significant portion of their retirement savings and the Court decided that it was more likely to be a temporary transfer of the money to help the couple get into a home. Ideally the status of the sum as a gift or loan should have been recorded at the time it was advanced.
There is a need to be careful. If an advance is defined as a gift it can affect the recipient’s entitlements to benefits from Work and Income (WINZ). Additionally, if the person giving the gift is receiving the Residential Care Subsidy, or intends to apply for it in the future, the gift may affect their entitlement, as WINZ may still include the gift as an asset.
To avoid costly and time-consuming disputes, it is worth discussing a proposed advance with a lawyer.
For advice on making an advance to loved ones or for more information on how a gift may affect WINZ entitlements, the team at Harmans are here to help.
