Points to consider when buying property in a trust

A trust is a legally recognised relationship between two entities, the trustee who holds assets such as shares or property and the beneficiaries who then benefit from the assets. Trusts are taxpayer entities, and trustees are responsible for registering the trust in the tax system and lodging tax returns.  

The trustee holds property and must deal with it as set out in the trust deed and follow relevant laws. Beneficiaries of the trust can be people or companies. If the assets of the trust generate income, it’s then distributed to the beneficiaries. A trust fund is where all the property, whether actual property or shares, is held and managed.

A family trust is commonly used by investors to buy property. Depending on your individual circumstances and financial goals, buying property through a family trust could help you reduce your tax liability and protect the family’s assets. However, setting up and managing a fund requires you to meet various legal and regulatory obligations. You should consider taking independent advice from financial and legal experts before setting up a family trust to manage your family’s assets.

As an investor, there could be some potential benefits to buying property through a trust. These include:

Tax benefits

A trust may help you save on tax. For instance, if you have a high income and pay a higher tax rate but have family members or other beneficiaries who pay lower tax rates. You can hold your assets in the trust and distribute the income generated from them to multiple beneficiaries, such as your family members. They will then pay tax at the rate applicable to them rather than you paying it at your higher rate and possibly giving them some of the income.

Asset protection

Buying the property through a trust will help protect it if you have liabilities or loans that you may be concerned about defaulting on. If you do default, the property may be repossessed to cover the losses; however, in the trust, it may be protected. The trustee is the owner of the property in the trust, so your creditors may not be able to repossess it easily.

Estate planning

The trust deed outlines how the trustee should proceed if any of the members die or have a disability, it can make the transfer of property smoother.

Buying a property through a family trust may have some benefits for you but you should also be aware of the cons.

Stamp duty

If you have an investment property in your name and transfer it to a trust, you will have to pay stamp duty which could be a substantial amount.

No benefit of negative gearing tax concessions

If you buy an investment property without a trust and the income it generates is less than the expense you incur, the loss is deducted from your personal tax income. This is called the negative gearing tax concession. However, you won’t get this benefit if the property is held in a trust. You and other beneficiaries will have to meet that loss but won’t get the tax break. 

Financing the property purchase

You can get a loan to buy an investment property through a trust, but your options will be limited as some lenders may be reluctant to finance it. This is because they perceive such loans as riskier due to the complex legal structure of trusts. Lenders may also not want to assist in financing the purchase because they may find it more difficult to repossess the property if you default, as the trust provides asset protection. 

Setting up a family trust to buy property may have some benefits but it’s important to get professional advice to avoid any pitfalls and risks. It could be worth speaking to a financial advisor to better understand the trust structure and how it impacts your finances to make an informed choice.