Gift tax legislation changes postponed

Low-interest rate loans between family members are often used to assist with big spends such as house deposits and existing gift tax legislation provides for the creation of a taxable benefit equal to the value of the interest foregone by the individual lending the money.

Given the extremely low deposit rates available, this legislation generally did not cause any erosion of the tax-free thresholds available to shelter benefits from gift and inheritance tax, with most free use of money benefits being well sheltered by the €3,000 small gift exemption available annually.

The Finance Bill as initiated on 21 October 2021 provided for amendments to the free use of property legislation to read “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”. This would have substantially changed the position as there is quite the differential between deposit interest rates versus loan interest rates, and the interest rate on loans is often variable.

There would also be the argument that if a loan was provided for the purchase of a house, the exact wording of the legislation would mean you would have to apply mortgage interest rates to value the benefit. Given the complexity of calculating such a benefit in this scenario, the proposed measure received some criticism from the financial sector.

Using loans

A loan can be a valuable tool and it is important that it is protected. However, there must be a genuine intention that the loan will be repaid either in the life of the individual giving the loan or it will be treated as a debt owing to the estate when that individual passes away.

We would recommend a loan agreement is entered into, even between family members which sets out the conditions of the loan, when and how it will be repaid, and what will happen on the death of either party. If a loan is forgiven then it becomes a gift immediately and Capital Acquisitions Tax (CAT) implications arise. Some individuals choose to use a Will to forgive any element of a loan that remains unpaid, but again, the forgiveness would be treated as an inheritance and subject to the normal CAT rules.

Given the comment by the Minister that such legislation required further consideration, it may be prudent to think about the timing in relation to making such loans, or even consider the balance of existing loans.

Change of plan

Within a couple of weeks, the Minister for Finance Paschal Donohue decided not to proceed with the amendment to the legislation but did say that additional consideration needed to be taken in respect of the planned change. This would suggest that the change is not completely off the table for the future.

With increasing inflation and discussion around an uplift in interest rates, a loan provided to a child for the purchase of a house could result in interest well above the small gift exemption amount of €3,000, which would affect the transfer of future wealth if the parent-child group (a) tax-free threshold is somewhat used or used entirely. Given the average house prices around the country, such interest on a loan would not take long to use the tax-free threshold of €335,000.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars private client team below:

February 2022