The Bank Of Mammy & Daddy | Revenue Interest Rate Rules

  • By: Walter Dunphy ACCA
  • Date: December 29, 2021
  • Time to read: 4 min.

There has been an increase in buyers turning to the bank of Mammy & Daddy to help them secure their dream home. In this blog post we will take you through everything you need to be aware of from a tax perspective when receiving a loan from a parent/grandparent.

The housing crisis in Ireland is making it difficult for many first time buyers to get on the property ladder. There is a huge shortage of supply as the country still feels the lasting effects of the 2008 financial crash. The cost of newbuilds have also skyrocketed due to pandemic supply chain issues disrupting the markets for many important materials.

According to the Central Statistics Office the percentage change in the Residential Property Price Index for the 12 months to October was 13.5%.

Source: https://www.cso.ie/en/statistics/prices/residentialpropertypriceindex/

First-time buyers are not only being squeezed out by inflation, but also by strict Loan-to-Income lending rules. The LTI limit restricts the amount of money you can borrow to a maximum of 3.5 times your gross income. So for example, a couple with a combined income of €80,000 can borrow up to a maximum of €280,000.

The deposit requirements differ depending on whether you are buying your first home, owned a property before or if you are buying a property that you intend to lend out

  • First-time buyer – 10%
  • Owned a property before – 20%
  • Rental property – 30%

Government initiatives are in the pipeline to ease the pressure on the housing market such as the shared equity scheme which involves the State paying for up to 30 per cent of the cost of new homes in return for a stake in the property.

These initiatives may be too little too late for many that are currently in the process of entering the housing market. And many have turned to their families for loans to help them stump up the deposits and meet the cost of the house.

Revenue Treatment of Interest-Free Loans From Parents

The usual arrangement between parent and child is to lend a sum of money with a zero interest rate attached and no specified term of repayment. The parent is legally entitled to charge zero interest.

From a tax perspective, this notional interest that you didn’t have to pay on the loan from your parents is viewed as a gift.

If you receive a gift in Ireland above your tax-free thresholds you will pay 33% Capital Acquisitions Tax on the balance. Luckily there are generous tax-free thresholds to help minimise any tax due.

But what interest rate should be used to calculate how much of a gift the child is receiving?

Well, the interest rate that is commonly used to calculate this amount would be the interest that the parent has foregone by not leaving this money in their own deposit account.

Deposit rates for banks such as Allied Irish Bank and Bank of Ireland are currently at record lows of between Example 0.1%-0.25%.

A child is entitled to a lifetime tax-free threshold of €335,000 (Category A) in respect of gifts and inheritances taken from his or her parents. You also are entitled to a lifetime tax-free threshold of €32,500 (Category B) for gifts from Grandparents, Uncle/Aunt & Brothers/Sisters.

Source: https://www.revenue.ie/en/gains-gifts-and-inheritance/cat-thresholds-rates-and-aggregation-rules/cat-groups-and-group-thresholds.aspx

Separately, you may receive a gift up to the value of €3,000 (Small Gift Exemption) from any person in any calendar year completely tax-free.

Let’s now take a look at an example:

A parent lends €100,000 to their child to help them purchase a property. The child repays this loan 10 years later. Now lets calculate how much Interest the parent has foregone annually:

The annual interest in this example is just €250 as deposit interest rates in Ireland are currently at all-time lows.

As this annual interest is well below the small gift threshold of €3,000, therefore the child accrues no tax liability. And their lifetime gift threshold remains intact at €335,000.

From the perspective of the parent, however, they will need to include this €250 interest as a taxable benefit in their annual tax returns.

Historically rates would have been as high as 4% which would have resulted in the loan accruing €4,000 in interest annually from the perspective of the value of the gift from a parent to child.

Central Banks have been looking to increase rates over the next few years so this will mean that the notional interest amounts on loans from the bank of mum and dad will also increase.

In summary, even though you may not pay interest on a loan from a parent you must still work out the value of this interest foregone by your parents and then treat this as you received a gift. As interest rates are low at the moment it should therefore mean you are unlikely to have to pay tax on this gift as the small gift exemption should be plenty to cover it.

This post is for educational purposes only and should not be construed as financial advice.

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