TAX TIP #6: ASSET PROTECTION | GIFT & LOAN BACK STRATEGY OR SIMILAR

Facts

Clients, being at risk professionals, have purchased their home (main residence) in their personal names to obtain the generous advantages of the CGT main residence exemption.

Question 1

Can they protect the equity in the property?

Answer

Yes.

There are two (2) options:

A. transfer the home to a low risk trust; or

B. implement a gift & loan back or similar strategy.

Question 2

Which is the better strategy?

Answer

Option B, as the advantages of $nil stamp duty and continuation of CGT main residence exemption are superior to the advantages under option A.

Tax Tip

Option A:

advantage:

1. nil maintenance – once the property is transferred, the low-risk trust (as its name suggests) protects the property

disadvantages:

1. stamp duty applies

2. the property may not be able to access the CGT main residence exemption when the trust sells the property (see Tax Tip #5)

3. legal costs, but lower than option B

4. the 4.5 to 5.5 year bankruptcy claw-back continues to apply as the transfer to the low-risk trust will likely be an undervalued transaction

5. for existing mortgage(s) on the property – refinance costs

Option B:

advantages:

1. $nil stamp duty – significant advantage

2. CGT main residence exemption continues to apply

disadvantages:

1. some maintenance – the gift amount must be topped up when the equity grows (preferably annually)

2. legal costs higher than Option A

3. the 4.5 to 5.5 year bankruptcy claw-back will apply as the gift to the low-risk trust will be an undervalued transaction

4. for existing mortgage(s) on the property – possibly deed of priority requirements of first mortgagee - generally low cost

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