Is the Bank of Mum & Dad still facing a tax break?

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It is a lender that has been around for decades, providing low cost (mostly free) loans to its select customer base.

Their financial clout seems to have grown in recent years, but so has the demand for their services and the size of their loans.

Although it operates quietly across the country, it has become known here once again in the past 14 days.

Government finance law puts the “Bank of Mum and Dad” in the spotlight – especially how it does business and how it is treated for tax purposes.

Proposed changes in the way family loans are treated as donations for tax purposes have been rowed back in the eleventh hour, but will there be a change and will revenue be more focused on how money is transferred within families?

What is the current tax regime for family loans?

The parent could charge interest on a loan given to a child to top up a down payment for a home purchase and exclude tax liability for the child or their descendants.

But this is generally not the practice and would run counter to the logic of providing financial assistance to a child in a highly competitive housing market.

The current tax liability is based on the deposit rate applicable on the market.

In fact, it is calculated based on the loss the lender (mother and father) would suffer if they did not have the money in a deposit account.

Previously, a deposit would have received an interest rate of around 2%.

So if the parent gave a loan of € 100,000 with no interest rate, the tax office would consider it a gift of € 2,000 per year.

However, since the deposit rates have been zero or close to zero in recent years, the gift has been made essentially tax-free.

So what was in the finance law?

The finance bill had proposed dealing with this anomaly by shifting the focus from the deposit rate to the lending rate.

In other words, if the borrower had borrowed the money from a financial institution, the borrower had to determine the benefit he would get from not having to pay the prevailing market interest rate.

It would involve some homework and a compilation of documentation on the part of the borrower.

The details were not known, but if the rate was based on the lowest mortgage rate on the market it would be around 2 to 3%.

For the above loan of € 100,000, the liability would be around € 2,000 to € 3,000.

However, if the loan rate were based on a personal loan, it would be a heftier 5 to 7%, meaning the liability would be between € 5,000 and € 7,000 for the same € 100,000.

Why was it withdrawn by the minister?

“There was no obvious benefit to the Treasury Department,” suggested Norah Collender, Professional Tax Leader at Chartered Accountants Ireland.

She explained this in connection with the small gift tax exemption of 3,000 euros that a person can give in one year.

“You can get a small gift of 3,000 euros from each parent, that would be 6,000 euros, which could cover the interest portion.”

So, even if the taxable benefit was based on the loan rate rather than the deposit rate, in most cases it would still be below the small gift exemption limit.

Mortgage broker Michael Dowling, managing director of Dowling Financial, suspects the decision may also have been politically motivated.

“I’d say it’s like interfering with capital gains tax on the sale of a single family home. If you get the impression that the same people are constantly being hit by different tax increases, that would be going too far,” he said.

“And besides, anything that happened would make the parents pay for it in the end.”

Surely there is a societal fairness argument?

And that is the crux of the problem.

There is a cohort who can afford to get a loan from their parents and then there are those who cannot.

The housing shortage is well documented and anyone who can afford to increase their offer for a property with parental allowance (while the others are restricted by credit limits) will receive the keys for the house or apartment at the end of the year.

And at a time when nest egg is not making a profit from banks – and, if the size is right, they can even be charged with negative interest – there is a built-in incentive for parents to give the money for children.

Must this contribute to house price inflation?

“There’s no question that this will affect prices,” said Michael Dowling.

“If 3 or 4 people bid on the same house for € 400,000 or € 500,000 and one can take € 50,000 out of his hat to make the difference, that will affect prices. And as soon as another home in the area comes up for sale, the benchmark will be set by the price that the first home was chosen for, ”he added.

And the loans keep getting bigger.

“I’ve been in business for 30 years and over the past few years € 10,000-30,000 has been the level you would see. Now $ 50,000 to $ 60,000 is pretty common and $ 100,000 wouldn’t surprise me, ”Dowling explains.

He cited a few examples in which buyers essentially receive an advance payment on their inheritance with a gift, as opposed to a loan, up to the current maximum lifetime threshold of € 335,000.

Figures on the total amount loaned to children of the family are not available, but Michael Dowling estimates it could be up to 1 billion euros per year.

Is this the end of the road for this problem now?

The fact that the measure was included in the finance law without being included in the budget last month surprised many.

The finance minister gave no reason to backtrack on the plan other than that it needed further scrutiny.

“The minister has decided not to pursue Section 62 of the draft law on the tax treatment of interest-free or soft loans as he believes the proposal needs greater attention,” the ministry said in a statement in which the Ministers welcomed a number of government changes to the finance law which might indicate that at least some political resistance has emerged.

Whether it will be part of next year’s budget or the finance law may well be the case after “more careful consideration”.

One approach that would not require a legislative change is for revenue from the tax authorities to ensure that such loans are repaid and are not effective gifts from parents to children.

“Revenue can show that a loan is being paid and is not a gift of money,” explained Norah Collender.

“You have the power to question any transaction that has tax implications. For example, with all CAT exemptions for corporate relief and agricultural relief, revenues have increased in recent years, ”she added.

That way, they get better oversight of transactions and put the responsibility on both parties who give away or inherit to prove they are compliant.

A similar approach could be applied when using family loans to ensure that it is indeed such a transaction and that it is repaid or, if not, declared as a gift that counts against the lifelong inheritance / cash tax exemption , which currently stands at € 335,000.

We haven’t heard the last of them yet.


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