My wife and I are in a fortunate position to have been offered a loan of €100,000 from my parents. We have our own house but are thinking of renovating.
I have seen you previously said that Revenue view this as either (a) no interest was charged and the interest is therefore a gift to you, or (b) the interest that should have been charged was taxable income for them. The small gift exemption from both my parents equates to €6,000: this covers any issues re interest!
We have a loan document drawn up and the four of us will sign it for clarification if Revenue and/or the bank come looking. For argument’s sake, if we pay €6,000 a year back over 17 years, are we covered with the small gift exemption of €3,000 per year per parent?
Can my parents authorise their bank to transfer the “loan” to our joint account without notifying Revenue? (Dad is voicing that it’s their money and they can loan/give it to anyone they want)
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Would the bank want/need the loan agreement between parents and son/daughter-in-law?
Is my wife entitled to “small gift exemption” from my parents?
How is best to avoid any complications from Revenue?
Mr J.L., email
You are certainly fortunate and it does make sense to try to arrange such a project in a way that maximises your benefit.
People can expend an awful lot of energy trying to minimise tax issues, especially on intergenerational or family financial assistance and yet ignore the small gift exemption which is, in my view, one of the most useful ways to legitimately arrange such transfers.
It comes into its own particularly for families that are reluctant to do anything that might eat into a tax-free threshold on inheritance – of whom there are an abundance in Ireland for reasons that I have never really understood.
The small gift exemption, at €3,000, might seem relatively insignificant in the context of major financial outlays, such as the renovation you plan, but that is to underestimate its usefulness.
In your case, where both your parents are alive, they can each “gift” you up to €3,000 a year without any tax implications for anyone. That, as you note, is “free money” of €6,000 a year.
And, to answer one of your questions, there is nothing to stop them, if they choose, also gifting up to the same sum to your wife. That brings the potential tax-free financial gift up to €12,000 between you, or €1,000 a month, which is a decent sum in anyone’s book.
You don’t ask but, should your wife’s parents be alive, it would also be open to them to gift each of you the same sum if they had the resources to fund such a gift and a mind to do so. That has the potential to double the sum again and you’re still just looking at the possibilities within your direct family unit. For most people, the limitation on use of the small gift exemption is not what is circumscribed by the rules but whether they have sufficient excess cash to consider such largesse in the first place, especially with the significant rise in the cost of living currently.
People also assume that there must be some family relationship to make such a tax-free gift permissible, but that’s not so. Clearly, it is normally most relevant for families, but any person can gift up to €3,000 to anyone – family, friend or even a stranger – within the terms of the exemption.
The only issue is that the gift must be for the use of the recipient.
So, for instance, if your parents were to gift you money and also, if you have children, gift the same to them with the intention that the money would all go to fund the renovations, you would have an issue. Revenue would not accept that children would use such a gift to fund family home renovation.
In such a case, they would determine that the parents were the beneficial recipients of the gift and anything more than the first €3,000 would be set against the relevant inheritance/gift tax-free threshold.
So they’re the rules. Now what about the structure you propose?
The Revenue Commissioners’ default position would likely be that the €100,000 in this case would be viewed as a gift, rather than a loan so it would be sensible to draw up a document outlining the fact that it is a loan and the terms of such a loan – in your case that it is being repaid at €6,000 (or up to €12,000 if your wife is also receiving the benefit of the exemption from your parents) per annum.
There is no legal requirement to do so but Revenue can seek evidence of the status of an asset transfer and with no paperwork or evidence of actual repayments from your account to that of your parents, you might struggle to convince them.
Having said that, there is zero obligation on your parents (or you) to notify Revenue of any such transfer. Your dad is absolutely correct. It is your parents’ money and they are free to do what they choose with it, without reference to anyone.
As far as their bank is concerned, not only will it not want or need any loan agreement to be in place, it has absolutely no role in this proposed transaction beyond following your parents instructions as they would do for any customer. It can step in only if it suspects fraud or money laundering but not to seek sight of a loan agreement that is none of its business.
Now if your parents were looking to borrow from the bank to fund this project, that would be different but, as it is, your parents can transfer the cash to your joint account as and when they choose to.
Finally, in relation to the interest rate, the law currently states that the interest rate applying on an inter-family loan must match what the lender could receive in interest if that money was held in a demand deposit account with their bank. At present, that is bugger all and would be amply covered under the small gift exemption as proposed but, with interest rates rising once again, that may change over the coming years.
The Government did consider changing that reference point in the last budget to the rate at which the money could be borrowed in the market. It decided not to proceed although it did hold out the prospect of returning to the issue.
Clearly, if that happened, the applicable interest rate would be substantially higher – and probably not fully covered by your proposed “repayment” of €6,000 a year.
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
