It Depends – Gift and loan back strategies18 October 2021 Topics: Estate planning, Professional advisers
In this edition of ‘It depends’, senior associate Steven Jell talks about gift and loan back strategies.
Hi, during this edition of It Depends, we’re going to talk about gift and loan back strategies.
What is a gift and loan back strategy?
Placing an asset in a separate entity and outside of an individual’s personal name is a simple strategy to mitigate their personal and business risks. But what happens if that entity did not exist at the time we purchased that asset? Or if it’s better to keep the asset in the individual’s name for certain reasons? One option is to make a gift and loan back strategy to protect that specific asset. In its simplest form this involves the transfer of the value of that asset to an entity, usually one in which the individual member controls. The ownership remains the same, but the value is shifted to that related entity.
How does it work?
So, the starting point is to determine the asset we’re looking to protect and the market value for that asset itself. The owner transfers an amount of cash equal to the value of the asset that we’re looking to protect to that related entity. The related entity then loans, the same amount of money back to the individual and takes security for that loan over the asset itself. So, the ownership remains the same. The value of the asset has essentially shifted to that related entity. One of the key considerations when we’re looking to implement a strategy like this is to ensure that related entity has zero risk itself. So, it essentially should be a passive asset holding entity.
What assets can be transferred?
Generally, this type of strategy works really good when we’re trying to protect a person’s home. It’s an asset that we like to keep in their personal name for capital gains tax and land tax purposes and it’s an asset that we can easily secure by way of a registered mortgage. It is possible to implement a strategy like this over other personal property, and we would use a security interest registered on the PPSR to provide security over that asset.
Do I need to transfer cash?
Generally, we recommend an amount of cash be gifted and physically transferred to the associated entity and the loan be transferred back to the individual themselves. If no cash changes hands, then it’s arguable that the value has not shifted and the strategy is less effective.
What are the tax implications?
Generally there are none. Because the underlying beneficial ownership of the asset hasn’t changed, we haven’t triggered a capital gains tax event or any transfer duty consequences.
Can a strategy like this be reversed?
So, it depends. Done properly, a strategy like this can be very effective. The security taken by the lender for the loan can place the lender at a higher priority than other creditors. The bankruptcy clawbacks need to be considered before implementing a strategy like this, particularly where related parties are involved. The most important thing, is implementing a strategy like this, where there are no concerns regarding the individual’s solvency. The longer the period of time between the date that the initial gift and loan back is made to an eventual insolvency event, the better the strategy is going to be.
If you’ve got any questions or would like to speak to me or one of the team about gift and loan back strategies, please feel free to contact us. Thank you for watching this edition of It Depends.