Q&A: Dominic Coyle

Lending son money to buy his home

As long as the intention is that the loan is repaid as you outline, it will not, in itself, be deemed a gift

As long as the intention is that the loan is repaid as you outline, it will not, in itself, be deemed a gift

 

Our son has two-thirds of the cost of a house saved. A mortgage for the balance is a non-runner as his job at the moment is not permanent.We (his parents ) intend giving him the one-third balance (approximately €60,000) as a loan to be paid back in instalments each month. Is this transaction allowed without any revenue implications?

Mr PC, email

The issue of parental assistance to adult children has become increasingly contentious in recent times. Revenue has taken the view that there is clear abuse of the original provisions within the Capital Acquisitions Tax legislation.

While there is no evidence that the abuse has been widespread, there is concern in Revenue circles that wealthy individuals have been using exemptions within the Act effectively to fully fund the lifestyle. The original section 82 of the Act said that money paid by a parent for “support, maintenance or education” of a child would not be considered as a gift or inheritance for tax purposes where it would be considered “normal expenditure” of a person in the parent’s circumstances and is “reasonable having regard to the financial circumstances” of the parent.

In light of Revenue’s view that the concept of “support” was being stretched far beyond its original intention, it amended the section in the most recent Finance Act to restrict such support to minor children, or those in full-time education under the age of 25, as well as disabled adult children.

It also clarified, to some degree, what were routine family expenses and what were not. Weddings, for instance, qualify for relief, while wedding presents do not. Of more relevance here is that the purchase of a house, or even funding a house deposit, is very explicitly not considered a routine family expense and therefore is subject to tax.

However, in your case, you are not looking to gift this sum to your son but rather loan him the money. He has clearly already gone a long way to funding the cost of his future home. At a time when people are concerned about meeting the proposed new 20 per cent deposit requirement of the Central Bank, raising 66 per cent of the property cost is evidence of your son’s financial commitment to the project.

As long as the intention is that the loan is repaid as you outline, it will not, in itself, be deemed a gift. But a loan, in general, carries an interest charge – as, for instance, a mortgage would if your son was able to secure one. If your son is only repaying the loan with no allowance for interest, the “notional” interest that would be charged on such borrowings will itself be seen as a gift from you to him.

Of course, provided such interest did not exceed €3,000 a year, it could be considered to fall within the annual small gift exemption that you are entitled to give your son, or anyone else for that matter. As long as you have made no other gift to him in the tax year, that would ensure there was no tax liability as long as the reasonable “notional” interest on such a loan was below 5 per cent in your case (ie, 5 per cent of €60,000 equals €3,000).

So how do you, or Revenue more importantly, assess notional interest? Basically, you need to show what the interest rate would be on a similar loan from a bank.

If your son is purchasing the property with a partner, each is “entitled” to receive up to €3,000 a year from you by way of small gift exemption (and indeed a similar sum from your partner, if any). That would clearly cover any higher “notional” interest or possibly allow some of the loan capital to be written off each year without it physically being paid back.

Can each parent give €225,000 to child? Can you let me know if the CAT threshold of €225,000 for gifts/inheritances between parents and children is available per parent – ie, can each parent gift up to €225,000 free of CAT to a child?

Mr PK, Dublin

There was a time when the capital acquisition tax (gift/inheritance tax) threshold was per parent but that has long since disappeared. The thresholds now are aggregated and apply to gifts or inheritances from everyone in that category.

In relation to the €225,000 category A threshold which governs gifts and inheritances from a parent, the beneficiary has to tot up every gift and inheritance from either parent received since December 5th, 1991. So, no, each parent cannot gift or bequeath €225,000 to each child: the ceiling applies to gifts or inheritances to each child from both of them.

While rising property prices may well make that an issue for more families in the years ahead, the issue is even more stark for people in category B, where every gift from every linear relation (an uncle/aunt, grandparent etc) since the 1991 date must be added together by a beneficiary to assess whether they now have a liability above the €30,150 cumulative threshold.

Category C (gifts from “strangers”) is even tighter at €15,075 and can become a significant issue in relation to in laws or unrecognised partners.

Remember, when a gift puts a person beyond 80 per cent of a relevant category, it is incumbent on them to notify Revenue even though no tax liability yet applies.

Giving Mum gifts for children Can the “gift” of €3,000 for, say, each of three children be given as €9,000 to their mother?

Mr DM, email

The small gift exemption is specific to the individual. While in the case of very small children, it is unlikely that they will be in a position to manage the money themselves, it attracts relief only if it goes to them. In such a case, you would normally have an account opened in the name of the child and the parent.

But while the parent has the signing rights on such an account up to the age of seven, or whatever, the gift is still destined for the child and cannot be used for general family expenses.

Revenue specifically disallows the relief if the money is nominally given to Person A (say a child) and then effectively passed on to another person already in receipt of the small gift exemption for that year (say the mother).

Certainly, if three children are receiving the money and it all effectively passes immediately for the use of the mother in meeting household expenses, Revenue would not consider it a valid claim for exemption to capital acquisitions tax, which would then be liable at 33 per cent on everything after the first €3,000 effectively received by the mother.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.

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