Subscriber OnlyYour MoneyQ&A

Rules change on interest-free loans to family members

Intra-family loans are very common in Ireland but all sides need to be aware of the rules if they want to avoid unwelcome tax bills

Lending family members money to help at pinch points in their lives - like buying a home - is common but be aware that the Revenue rules have changed. Photograph: iStock

Dominic Coyle's face
Dominic Coyle
Sun May 5 2024 - 10:00

Our daughter and her family live in the midlands in a modest home, mortgage free. They are moving closer to Dublin and their home is in the final stages of sale. With the current rise in property prices and the proximity to Dublin it will cost them more to purchase a similar house.

My husband and I have some savings and so are in a position to provide a loan of about €50,000 to help them if required. Is this a possibility? If so, what steps do we need to take?

If we give our daughter the loan for the house, should interest be charged? If so how do we go about working it out, determining the rate, show it etc?

And if we decide to gift the amount instead of giving a loan, what would the implications be?

READ MORE

Do we need to go to a solicitor in the event of making a loan and/or a gift to have documents drawn up or is this something we can do ourselves?

Ms M.H.

You’ve certainly thought through the issues that arise here and it is timely because the rules in relation to what you do and do not need to tell the Revenue Commissioners in relation to family loans have changed this year.

I’ll get around to the gifting element of your query in a bit but we’ll stick to the loan side of things for now.

Parental loans are very common in Ireland where the parents are fortunate enough to be in a strong enough financial position to help their children without undermining their own financial security – hence the Bank of Mum and Dad moniker.

It arises most frequently where a child (with or without their partner) is trying to buy a home, as in your case. Property prices are a real challenge, especially in and around the big cities. Your daughter is fortunate to be mortgage free in her current home but will still need to borrow to finance their move.

You don’t say whether this loan will be alongside or in place of a mortgage but in terms of your queries that is irrelevant. It is certainly the case that you can lend your daughter money at rates below what she could secure from even the most competitive of our mortgage providers. And there is nothing to stop you doing so.

The essential difference between a family loan and a gift is the question of interest. If you are charging interest, we are talking about a loan; if no interest is being charged, it is clearly a gift.

[ Family concerned over inheritance if father marries again ]

But how much interest? Revenue says that the interest payable must be at least the rate the parent (or whomever is making the loan) could secure for a demand deposit in the banks.

Of course, that has been pretty academic in recent years given the rates on offer in the Irish banks when European Central Bank (ECB) interest rates were rock bottom, but the surge in ECB rates over the 15 months to last September means that it is now something people need to take notice of.

The rates are still not onerous – certainly compared with personal loan rates from the same banks – but AIB is offering 0.25 per cent annually on its demand deposit account, with Bank of Ireland paying 0.1 per cent and PTSB just 0.01 per cent. If you are lending to your daughter, you will need to ensure you are charging at least your own bank’s demand deposit rate – and, of course, that might change from time to time.

Revenue was pushing a couple of years back to change those rules to force families to match bank loan interest rates which would have taken a lot of the good out of family loans. But, in the event, that provision never made it into the Finance Act at the time.

However, it has clearly had more success since then persuading Minister for Finance Michael McGrath of the need for tighter controls on family loans – or at least more transparency over what is happening out there. As a result, since January, new rules have come into force. Critically, these apply not only to new loans after that date but also to any family loan taken out before then on which some repayment remains outstanding.

So what do these new rules say? The main requirement will be for holders of certain family loans to file a capital acquisitions tax (CAT) return each year, part of a trend by Revenue to require more filing of returns from all taxpayers.

The rules apply to any “specified loan or loans” a person receives from a “close relative”.

Close relative is broadly taken to mean anyone covered by category A or Category B tax exemption categories for CAT. That includes parents, obviously, but also a parent’s partner even where they are not a blood relation. Then there are what are called lineal relations – siblings, grandparents, great-grandparents, and any sibling of either parent or either parent’s civil partner.

The rules also cover loans from companies or between companies where those are controlled by people who would be considered close relatives.

[ Annuities or ARFs: what’s the correct decision? ]

A specified loan is one on which no interest is paid in the six months after the end of each year and, importantly, where the loan balance at any time during that year – not just at year end – was in excess of €335,000. If you have more than one family loan, you would need to tot them together and ensure that, between them, they did not exceed that €335,000 limit at any point during the year.

The fact that interest is applied but not paid during the period – simply rolling up with the loan capital – does not exempt you from filing a return. Interest must actually have been paid to qualify for an exemption.

In fairness, that threshold is fairly high. Most families will be dealing with much more modest sums where they can afford to lend to family at all. That certainly applies in your case, where you are talking about a loan of €50,000 or thereabouts.

Under the new rules, there is no distinction between informal loans and ones for which full paperwork has been drawn up.

That brings me back to your query about what paperwork you need to have either for a gift or a loan. It is certainly advisable to have a note outlining the status of the transaction, ideally signed by both parties, but there is no need to get a solicitor involved unless you would be more comfortable doing so. The important thing is to have a record and to keep it should it be required in the future.

For those who are caught by the new rules, they will have to file a return by October 31st of the following year, with the name, address and tax reference number/PPS number of the person who gave them the loan, the balance outstanding “and any other information that the Revenue Commissioners may reasonably require”. That is likely to include details of any interest rate being applied to the loan. The first filing is due in October 2025.

Using the stated interest rate, Revenue will determine what the “gift” or benefit was. If no interest is applied at all, it will assume the whole amount is a gift.

If you decide to gift this money to your daughter rather than giving it as a loan, there should be no tax implications for either of you. She is entitled to receive gifts or inheritances up to €335,000 over the course of her lifetime from her parents. This sum is way below that, unless she has previously received other very substantial gifts from you.

Just be careful that you are giving the gift to her and not jointly to her and her husband/partner. In the latter case, he or she would be assessed as getting half the money from you and the amount they can receive from you before tax is far more modest – just €16,250 – as they are seen as a “stranger in blood” to you, which would see the partner facing a tax bill.

And that €16,250 is also a lifetime limit of any gifts over the sum of €3,000 or inheritances they might have received before now from other friends or people who are not close blood relatives of theirs.

Finally, that €3,000 I referred to above is the tax-free small gift exemption. If you are charging interest to keep this €50,000 within the definition of a loan, each of you and your husband can gift each of your daughter and her partner €3,000 each tax year – or up to €12,000 between you to them as a couple.

No tax applies to this and that money could be used to offset notional interest charges and/or pay down the capital of the loan without eating into your daughter’s lifetime inheritance limit.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice

READ NEXT
LATEST STORIES