I have sold a property abroad and have €250,000 on deposit. My son is building a new house in 2022 and I’m wondering if I could loan him €100,000 to help him out. I realise the rules are changing in 2022 but I could do it any time in December 2021 and we could set up a loan agreement, even though my son doesn’t require the funds until 2022.
Ms C.Q., email
Well this is topical. The issue of family loans was one of the big surprises in the Finance Bill published last month. It hadn't been mentioned at all on budget day, nor was any concern flagged about the current rules ahead of a budget in which pretty much all the Government's intentions were leaked.
So it was a bit of a shock when the Bill – which puts legislative force on the measures announced in the budget (and a few others that come to mind after the speech, as you now know) – provided for a fairly radical change in approach.
There’s never been anything to stop people in your position lending to a child, a relative or a friend. The issue has always been the cost of such a loan.
You can, of course, charge interest but the whole point of most family or friend loans is that they are available at a discount to what the person might have to pay for a bank loan, or even interest free.
That's where the Revenue Commissioners get involved. If you give a loan at a preferential rate of interest, or charge no interest, the tax authority considers that you are making a gift to the person borrowing the money. This is set down in section 40 of the Capital Acquisitions Tax Consolidated Act (CATCA) 2003.
Revenue sets a benchmark to assess how much that gift is so that it can be set against the lifetime tax-free limit of gifts and inheritances that a person can receive.
Up until now, they assessed the scale of that gift by measuring what you, the lender, were losing out on by not having the money available to you to put into a bank demand deposit account. If you were lending €100,000 as in this case, and the demand deposit rate was 2 per cent, the Revenue would consider that you were “gifting” your son €2,000 a year if you gave him the money interest free.
The issue in recent years, however, is that demand deposit accounts are offering no interest at all. In fact, if you are fortunate enough to have substantial sums on deposit, you could even find yourself paying the bank for the privilege of them minding your money.
So someone in the Department of Finance, or maybe the Revenue itself, clearly decided that the purpose of CATCA's section 40 was being undermined by the current market rates on savings. People were receiving gifts according to the letter of the act but also not receiving gifts because the benchmark interest rate on savings in the market was zero.
They then hit upon the idea of referencing the scale of the gift against borrowing rates, which will never hit zero.
Rather than assess what you, the lender, were giving up by not putting the money into a savings account, they decided to switch the onus to the borrower and measure the benefit they were getting by not having to pay the “best” (lowest) available rate if they were to borrow the money instead from a bank.
The relevant part of the Finance Bill, its section 62, states: “Section 40 of the Principal Act is amended by the insertion of the following subsection after subsection (3): (3A). For the purposes of subsection (3), the best price obtainable in the open market for the use or enjoyment of money shall be equal to the best price obtainable of borrowing an equivalent amount of money in the open market.”
It’s a big difference. The best available rate on personal loans in the Irish market is about 6 per cent. That would leave your son facing the prospect of your son being deemed to have received a gift of €6,000 a year from you.
But then banks don’t appear interested in lending sums of that size other than as a mortgage. And mortgage rates are a lot cheaper – between 1.95 and 2.5 per cent fixed for periods of up to 10 years. So now you’re looking at a gift of closer to €2,000-€2,500 a year.
The idea is that this is a benefit to the recipient and should be deducted from their lifetime tax-free inheritance/gift tax limit. But, of course, if the “gift” was less than €3,000 over the course of a year, it could be covered by the annual small gift exemption which means that sums up to that threshold will not eat away at your lifetime inheritance tax free threshold.
Most of the financial support given by the Bank of Mum and Dad would seem to be covered by this exemption. Which makes you wonder why whoever dreamt up the Finance Bill change in the rules bothered.
Anyway, sense appears to have prevailed since you wrote earlier last week. On Friday, the Minister for Finance, Paschal Donohoe, announced that he had made a decision "not to proceed with section 62 of the Finance Bill as he believes greater consideration needs to be given to the proposal to value the free use of cash in a Capital Acquisitions Tax context".
So there will be no change after all in 2022. You are free to lend your son this €100,000 interest free whenever you like. You don’t need to rush to do it this year: you can wait until he actually needs it.
With demand deposit rates still stubbornly around zero, you are not losing out at all financially by not having it on deposit and he will not have any gift tax issues to worry about.
To be fair, there is a logic to the approach behind the original Finance Bill change and I wouldn’t be surprised to see it re-emerge in the future. But, as I have written elsewhere, when you’re in the midst of a crisis where young people cannot borrow enough to buy a home and cannot save enough because of the current market rents, being seen to add further financial pain is not a great way of winning the votes either of the young people concerned or of their parents.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into
