Our beloved daughter and her kin currently reside mortgage-free in a humble abode located in the midlands. They’re planning a relocation towards Dublin and their home is nearly sold off. Given the recent surge in real estate prices and being closer to Dublin will inevitably incur higher expenditure in acquiring an equivalent-sized house.
My spouse and I have accumulated a decent amount of savings throughout the years, thus, we are capable of extending a loan to them, around €50,000, should the need arise. Is this feasible? Furthermore, what precautions should we take?
In the scenario where we lend money to our daughter for the house, should interest be levied? If yes, then how should we calculate it, decide the rate, and record it?
Alternatively, if we choose to gift the amount instead of lending it, what will be the ramifications?
Do we need to engage a solicitor for drawing up the necessary documents in case of a loan or a gift, or can we manage it on our own?
Ms M.H., it’s evident you’ve contemplated the issues at hand and this is a fitting time since there were modifications in the rules regarding the disclosure of information to the Revenue Commissioners about family loans this year.
Let’s discuss the aspect of gifting a little later while we focus on the loan part first.
It’s a common phenomenon for parents in Ireland, blessed with robust finances, to assist their children in acheiving financial stability. This is why the term ‘Bank of Mum and Dad’ is popularly used.
This usually materialises when a child (alone or with their partner) intends to purchase a house, much like your situation. The daunting prices of properties especially around the cosmopolitan cities can be challenging. Your daughter is lucky to be mortgage-free in her present home but won’t be spared from borrowing to finance their relocation.
You haven’t specified whether this loan would replace or supplement a mortgage, but either way, it doesn’t impact your inquiries. Indeed, you can easily loan your daughter money at rates significantly lower than what’s offered by the most competitive mortgage providers. There’s no restriction barring you from doing so.
The fundamental distinction between a family loan and a gift usually lies in the interest: a loan involves interest while a gift doesn’t.
It has become important for families to be aware of and understand the interest payable on family loans, as revenue stipulates that the interest should at least match that which could be earned from a demand deposit at a bank. In recent years, the declining rates at Irish banks made it less of a concern, but with the resurgence of the ECB rates in the past 15 months, it’s become more pertinent.
While AIB offers an annual rate of 0.25%, Bank of Ireland provides 0.1%, and PTSB, a mere 0.01%. Anyone lending to their child must bear in mind to charge at least the demand deposit rate of their respective bank, a figure that may fluctuate over time.
Several years ago, there was an initiative by Revenue to alter this rule, aiming to compel the family loaners to align with bank loan interest rates, essentially curtailing the appeal of family loans. These changes, nonetheless, were not incorporated into the Finance Act at that time.
More recently, with the Finance Minister, Michael McGrath’s support, Revenue has successfully introduced stronger regulations on family loans, emphasizing stringent transparency. From January onwards, these new rules affect not only new loans but also previous family loans with outstanding repayments.
These new regulations necessitate that any individual who has received a ‘specified loan or loans’ from a ‘close relative’ must complete a capital acquisitions tax (CAT) return yearly. Broadly, ‘close relative’ refers to anyone falling under Category A or Category B tax exemption categories for CAT, encompassing parents, their partners even if not blood-related, siblings, grandparents, great-grandparents and relatives through a parent’s civil partnership. These measures are in line with Revenue’s trend towards demanding more tax returns from taxpayers.
Regulations now encompass loans given by or between organisations controlled by individuals deemed as close relatives. A designated loan is characterised by no interest being paid within a six month period following the close of each year. Crucially, should the loan’s balance at any juncture in the year (not only at year-end) exceeds €335,000, it must be identified as such. If you have multiple family loans, you are required to combine them and ensure they don’t surpass this limit at any point in the year.
Just because accrued interest isn’t paid in the set period – merely compounding with the capital loan – you are not excused from submitting a statement. Interest should be paid in full to qualify for an exemption. The identified threshold is rather high, applying to a relatively small number of families; usually, loans extended for family members are much more modest. This seems to be the case for yourself, related to a proposed loan of around €50,000.
The new legal guidelines make no distinction between formal, contractual loans and informal ones without full paperwork. This harks back to your question regarding necessary documentation for a gift or a loan. Whilst it’s recommended to have a record of the transaction signed by both parties, it’s not obligatory to involve legal counsel unless this makes you feel more comfortable. What’s vital is that a record is kept safely for future reference.
Those who are subject to these new rules will need to submit a statement by 31st October of the succeeding year, including details such as the name, address and tax number of the loan distributor, outstanding balance “and any other pertinent details the Revenue Commissioners may demand”. This will potentially include specifics of any interest rate applied to the loan. The initial statement is expected by October 2025.
Revenue will utilise the stipulated interest rate to establish the “gift” or benefit’s worth. If zero interest is applied, the entire loan amount is considered as a gift.
If you’re considering giving this sum of money to your child as a gift, rather than a loan, neither of you should face any tax obligations. Under the law, parents can provide gifts or bequests up to a total of €335,000 across their lifetime, which exceeds your proposed amount unless you’ve given large gifts in the past.
It’s important to make sure the gift is solely to your daughter and not shared with her spouse or partner. If shared, it will be viewed as a half contribution from you to each, and since they aren’t a direct relative, they have a much lower tax threshold at €16,250. This could indeed result in a tax bill for the spouse.
Additionally, the €16,250 limit pertains to any lifetime gifts exceeding €3,000 or any inheritances from non-blood relatives.
Lastly, a small gift exemption allows for tax-free gifting of €3,000 per tax year from both you and your spouse to your daughter and her partner, totalling €12,000 from both of you to them annually. This sum can be utilised to balance model interest rates or towards lowering the capital of the loan without touching your child’s lifetime inheritance limit.
For further enquiries, please contact Dominic Coyle through email at dominic.coyle@irishtimes.com or by mail to Q&A, 24-28 Tara Street, Dublin 2. Note that this column serves as a reader service and is not a replacement for professional advice.