Would you charge your daughter interest on a loan?

Analysis: Dominic Coyle answers one family’s conundrum

How do we determine the rate of interest at which we charge our daughter? Photograph: Alan Betson

How do we determine the rate of interest at which we charge our daughter? Photograph: Alan Betson

 

If we give our daughter a loan to allow her to buy a house, should interest be charged? If so, how do we go about working it out, determining the rate, show it has been paid etc?

Ms M.H., email

Revenue is tightening up the rules in this area as I have mentioned before amid concern that some wealthier parents were effectively funding their independent adult children in a manner that avoided tax bills for the adult child.

Funding property was a particular area of interest when the rules were made more restrictive a couple of years ago.

For that reason, you will need to be clear that this is either a gift – in which case it goes against the lifetime capital acquisitions tax (inheritance/gift tax) limit that your daughter can receive from her parents without paying tax – or a loan.

If it is a loan, then you are correct that interest needs to be charged and Revenue expects this to be at market rates, readily accessible from any bank website.

The benefit to your daughter is access to funds over and above what she might be able to get from a lender for her mortgage.

Keep records

You and/or she will need to keep records of the loan amount owing, including the interest, and any payments made etc.

It is worth noting that you could use the small gift exemption – €3,000 per annum from each parent in this case, or €6,000 in total – to effectively “offset” some or all of any interest bill which might make things more manageable financially for your daughter.

Beyond that, any forgiveness of interest or of part of the loan amount would count against the lifetime inheritance tax limit which, as of now, is €310,000.

To be fair, I’m not sure Revenue is going to be counting every cent but it certainly will want to be reassured that the money your daughter receives to buy the house is reasonably accounted for by her.

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

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