Loan Tip: Bare Trusts and Loans

Lenders will generally not lend to bare trusts.

A bare trust is where X owns for Y. An example is a parent holding title to a property that belongs to a minor child. The parent is the legal owner but the child is the beneficial owner.

Where someone holds legal title but doesn’t beneficially own the property then the lenders will not lend to the trustee of the beneficiary.

Where the lender doesn’t know the trustee is acting as trustee they may get away with it, but the trustee would be making false declarations if they said they were not acting as trustee.


Example

Bart wants to buy the neighbour’s property without disclosing it is him buying. Ned, the neighbour hates Bart and either wouldn’t sell to Bart or would add on another $50,000 to the price.

So, Bart sets up a company and it will act as bare trustee for himself. The company enters the contract and now Bart must find finance. None of the lenders will lend to the company if it is acting as trustee for Bart – it cannot give a proper mortgage. Bart also cannot find a lender which will allow him as a guarantor either.

Luckily, Bart’s father is cashed up and he funds the purchase.

After settlement title is changed from the company to Bart’s name, without duty or CGT, and Bart waves to Ned as he walks in with the keys as Ned walks out for the last time.


Note that lenders will lend to SMSF Custodian trustees.