Investing With A Trust

Buying property through a trust in Australia involves purchasing real estate under a legal entity rather than your personal name.

This strategic approach offers significant asset protection and tax efficiency for investors. However, trust home loans feature complex lending policies, higher setup costs, and strict documentation requirements.

What Is A Trust in Property Investment?

A trust is a legal structure where a trustee holds and manages assets, such as property, on behalf of beneficiaries. In property investment, trusts are primarily used to protect assets from personal creditors and to distribute rental income efficiently among family members.

Key Trust Roles Explained

Understanding trust terminology is crucial before applying for a loan. Here are the core legal and structural roles within a property trust:

Types of Trusts Used for Home Loans

The four main types of trusts used for property investment in Australia are Discretionary Trusts, Unit Trusts, Hybrid Trusts, and Self-Managed Super Funds (SMSF). Each structure serves a distinct investment and tax strategy.

Discretionary / Family Trusts

A discretionary trust, commonly known as a family trust, allows the trustee to decide how income is distributed among beneficiaries. Consequently, this is the most popular structure for minimizing tax liability within a family.

Unit Trusts

A unit trust divides the trust’s assets into fixed shares, or “units.” Income is distributed strictly according to the number of units each beneficiary holds. Therefore, this structure is ideal for unrelated property investment partners.

Hybrid Trusts

A hybrid trust combines the features of both discretionary and unit trusts. It offers fixed entitlements to income for some beneficiaries, while allowing the trustee discretionary power over remaining funds.

Self-Managed Super Funds (SMSF)

An SMSF is a specialized trust designed for retirement savings. Borrowing through an SMSF involves strict Limited Recourse Borrowing Arrangements (LRBA) and is heavily regulated by the Australian Taxation Office (ATO).

Pros And Cons – Why Buy Property Through a Trust?

Buying property through a trust provides excellent estate planning and asset shielding. Conversely, the drawbacks include complex setup processes, potential loss of negative gearing benefits against personal income, and higher ongoing accounting fees.

The Benefits

• Shields your property portfolio from personal legal disputes or creditors.
• Allows trustees to distribute rental income to beneficiaries in lower tax brackets.
• Simplifies the transfer of wealth, as trust assets do not form part of a personal estate upon death.
• Trusts may still be eligible for the 50% CGT discount if the property is held for over 12 months.

The Drawbacks

• Setup fees, corporate trustee registration, and ongoing accounting fees are higher.
• Trust losses generally cannot be offset against your personal income.
• Fewer lenders offer trust loans, and the application process requires deeper scrutiny.
• Some Australian states impose higher land tax thresholds on trust-owned properties.

How Do Trust Home Loans Work?

Trust home loans function differently than standard residential mortgages. Because trusts are complex legal entities, lenders assess the trust deed, the corporate trustee, and the financial strength of the directors. Some lenders process these through commercial lending divisions.

Borrowing Capacity and LVR Limits

Lenders view trust structures as higher risk, which directly impacts borrowing capacity. Generally, the maximum Loan-to-Value Ratio (LVR) for a trust home loan is 80% without incurring Lenders Mortgage Insurance (LMI).

However, some specialist lenders allow you to borrow up to 90% or even 95% LVR for investment properties, provided you pay LMI. Furthermore, your borrowing power (serviceability) is assessed on the combined income and existing debts of the trust and its directors.

Who is Liable for the Loan?

Even if you use a corporate trustee to buy the property, the lender will still require a personal guarantee. This means the directors of the corporate trustee, or the beneficiaries, are held personally liable if the trust defaults on the mortgage.

4 Steps to Apply for a Trust Loan

Establish the Trust

Have a solicitor draft your certified Trust Deed and register your Corporate Trustee (ACN) and ABN.

Organize Financials

Gather income evidence for both the trust (if existing) and the individual directors.

Obtain Pre-Approval

Work with a specialized mortgage broker to find a lender with favorable trust lending policies.

Sign the Contract

Ensure the purchase contract is explicitly signed in the name of the trustee as trustee for the trust.

Required Documents to Apply

To secure a home loan through a trust, you must provide specific legal and financial documentation. The required documents typically include:

• A certified copy of the executed Trust Deed.
• The trust’s ABN and the corporate trustee’s ACN (ASIC registration).
• Personal Identification (ID) for all trustees, directors, and adult beneficiaries.
• Two years of tax returns and financials for both the trust and the individual guarantors.

Transferring an Existing Property into a Trust

Transferring an existing property into a trust legally constitutes a change of ownership. Consequently, you will trigger a Capital Gains Tax (CGT) event and must pay stamp duty on the property’s current market value, even if no money changes hands.

Applying for a trust loan

You can apply for a home loan to buy an investment property in a trust. Our company has mortgage brokers that specialise in helping people borrow money using their trust.

Please contact us on 1300 889 743 or complete our free assessment form to discuss your needs with one of our brokers.