My wife and I are in a happy position to have been offered a loan of € 100,000 from my parents. We have our own house but are considering renovating.
I have seen that you have previously said that Revenue sees this as either (a) no interest was charged and the interest is therefore a gift to you, or (b) the interest that would have been charged was taxable income for them. The small gift exemption from both my parents is equivalent to € 6,000: this covers all issues of interest!
We have prepared a loan document and the four of us will sign it for clarification if Revenue and / or the bank come and look. For the sake of argument, if we pay € 6,000 per year back over 17 years, are we then covered by the exemption for small gifts of € 3,000 per year and parent?
Can my parents allow their bank to transfer the “loan” to our joint without notifying Revenue? (Dad says it’s their money and they can lend / give it to whomever they want)
Would the bank want / need the loan agreement between parents and son / daughter-in-law?
Is my wife entitled to “exemption from small gifts” from my parents?
How is it best to avoid complications from income?
Mr JL, email
You are really lucky and it makes sense to try to arrange such a project in a way that maximizes your benefit.
People can put an enormous amount of energy into trying to minimize tax issues, especially on financial assistance between generations or families, and still ignore the small gift exemption that I think is one of the most useful ways to legitimately arrange such transfers.
It comes into its own, especially for families who are reluctant to do something that could erode a tax-free threshold for inheritance – of which there is an abundance in Ireland for reasons I have never really understood.
The small gift exemption, of € 3,000, may seem relatively insignificant in connection with large financial expenses, such as the renovation you are planning, but it is to underestimate its usefulness.
In your case, where both your parents live, they can each “gift” you up to € 3,000 per year without any tax consequences for anyone. That is, as you note, “free money” of € 6,000 per year.
And to answer one of your questions, there is nothing stopping them, if they so wish, from giving up the same amount to your wife as well. It gives the potential tax-free financial gift up to € 12,000 between you, or € 1,000 a month, which is a decent amount in someone’s book.
You do not ask, but if your wife’s parents were alive, it would also be open to them to give each of you the same amount if they had the resources to finance such a gift and a thought to do so. It has the potential to double the amount again and you are still just looking at the possibilities within your immediate family unit. For most people, limiting the use of the small gift exemption is not what is limited by the rules but whether they have enough cash surplus to consider such large ones in the first place, especially with the significant increase in the cost of living at present.
People also assume that there must be some family relationship to make such a tax-free gift allowed, but that is not the case. Of course, this is usually most relevant for families, but any person can give up to € 3,000 to anyone – family, friend or even a stranger – within the conditions of the exemption.
The only problem is that the gift must be for the recipient’s use.
So, for example, if your parents would give you money and even if you have children, give the same to them with the intention that all the money would go to finance the renovations, you would have a problem. The proceeds would not allow children to use such a gift to fund the renovation of the family home.
In such a case, they would determine that the parents were the beneficiaries of the gift and more than the first € 3,000 would be set aside against the relevant inheritance / gift tax-free threshold.
So those are the rules. What about the structure you are proposing?
The standard position of the Revenue Commissioner would probably be that the € 100,000 in this case would be seen as a gift rather than a loan, so it would make sense to draw up a document describing the fact that it is a loan and the terms of such a loan. a loan – in your case it is repaid with € 6,000 (or up to € 12,000 if your wife also benefits from the exemption from your parents) per year.
There are no legal requirements to do so but Revenue can seek proof of the status of an asset transfer and without any paperwork or proof of actual refunds from your account to your parents’ account you can fight to convince them.
That said, there is no obligation on your parents (or you) to notify Revenue of any such transfer. You sad are absolutely right. It is your parents’ money and they are free to do whatever they choose with them, without reference to anyone.
As for their bank, not only will it want or need to have a loan agreement in place, it has absolutely no role in this proposed transaction other than following your parents’ instructions as they would for all customers. It can only intervene if it suspects fraud or money laundering, but not to see a loan agreement that is not its thing.
If your parents now want to borrow from the bank to finance this project, it would be different, but as it is, your parents can transfer the money to your joint account when and when they choose.
Finally, in relation to the interest rate, the law currently states that the interest rate that applies to a family loan must be in line with what the lender could receive in interest if the money was kept in a deposit account with their bank. At present it is even more sad and would be abundantly covered by the exemption for small gifts proposed, but when interest rates rise again it may change in the coming years.
The government considered changing that reference point in the latest budget to the rate at which the money could be borrowed at the market. It decided not to proceed even if it had the opportunity to return to the matter.
If that happened then the applicable interest rate would clearly be significantly higher – and probably not fully covered by your proposed “repayment” of € 6,000 per year.
Send your questions 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
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