If I sell my house, can I give 50 per cent to a friend of mine as a loan without any involvement of the Revenue? Does Revenue need to know when the loan is being repaid or be provided with information on the repayments and/or just interest etc?
– Ms J.P.
Can you? Yes. Should you? That’s not so straightforward a question.
Lending within families or among friends has been going on as long as some people had funds and others had short-term need of them. It’s a very informal marketplace and one that works quite well most of the time.
The issue for the Revenue Commissioners is clear: they are not there to police loans, but there is very precise legislation that governs the taxation of gifts and inheritances. As most people will know by now, there are tax-free lifetime thresholds governing such gifts and inheritances. These range from the relatively generous €335,000 for children receiving from their parents down to a far more modest €16,250 for gifts or inheritances between people who have no direct blood lineage.
Revenue’s main concern is to satisfy itself that a financial arrangement between two people is indeed a loan and not a gift wrapped up to look like a loan.
In reality, unless they have reason to examine a person’s finances, it is not something that might ever cross their radar. But, if, for any reason, they do have reason to inquire, both you and (more importantly) your friend will need to be able to show that the money received was indeed a loan. If not, they could face a very large tax assessment – especially if the sum involved is half the value of an Irish property in 2023. That will be a multiple of the tax-free threshold that they might enjoy – and the applicable tax rate is 33 per cent.
So it makes common sense to put some basic formalities in place.
This is true, quite apart from Revenue. It is great that you feel you are in a position to help a friend out to the tune of half the proceeds of the same of your home, but that leaves you very exposed. The world is full of families and friends no longer talking to each other for one reason or another, and money is often a common denominator.
If someone is looking to borrow the sort of sum you are talking about, the natural first recourse would be to a mainstream lender. Very few people, even if they thought of it, would have friends with that sort of ready money to hand.
Has this person already been turned down by a lender? If so, the assumption is that this is for one of two reasons – a poor credit history or concern by the lender that the loan applicant does not have the financial capacity to repay the loan. These are also factors that should concern you, unless you are in a position to write this sum off in a worst-case scenario.
But they are not automatic deal-breakers. We all know people who were financially humbled during the financial crash and its aftermath either because they had become overleveraged or perhaps because of the break-up of a relationship during that very stressful period. Just because that may have led to default at the time, and a damaged credit rating, it is quite possible they now have the wherewithal to meet loan commitments – especially if you are looking at a more extended loan period.
Interest rates are also a factor here. The best rate you’ll get on a personal loan from an Irish lender right now is 4.9 per cent at An Post. More commonly it is around 6 per cent, rising as high as 8.95 per cent with AIB for a home improvement loan, according to price comparison website Bonkers.ie. And in some cases these are variable rates that could rise further as the European Central Bank (ECB) continues to raise its rates.
By comparison, as long as you are agreeable, for it to qualify as a loan your friend needs only pay you interest equivalent to what you could secure on a demand deposit account. And, despite recent ECB rate rises, that still remains at zero with certain banks, which means you can offer this friend the money with no interest payment.
The difference for them can be significant. A 10-year loan of €50,000 from you at zero interest would involve monthly payments of €417, or €5,000 a year. With An Post’s market-leading rate, the friend would be paying €525.45 a month, or over €6,300 a year and over €13,000 interest over the life of the loan.
That example is simply for comparison. With the sort of loan you are talking about, there do not have to be monthly payments. You could decide between you to organise payments on some class of regular basis – weekly, fortnightly, monthly or even annually – or you could work on the basis of random repayments. You could even simply agree that the money will be repaid as a lump sum at some later point with no interim repayments.
Assuming you are happy to continue with the loan, there should be paperwork drawn up between you, signed and retained by both, outlining the sum borrowed and the terms – ie interest rate and when and how it will be repaid. With the sort of sum you are talking about, I would very strongly advise that this should be done through a solicitor to put some class of formality on the arrangement. It’s not a big expense but it might provide great peace of mind to both of you.
You don’t need to tell Revenue that you have made the loan or that it has been repaid. If interest is paid, that might be an issue for Revenue as it would be classed as income for you and you will need to file a return at that time.
And do bear in mind, if demand deposit rates do rise from zero – as they will – you will be obliged to charge this friend some interest. Otherwise the whole arrangement unravels again in Revenue’s eyes.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to email@example.com. This column is a reader service and is not intended to replace professional advice