BANK OF MUM & DAD – CAPITAL ACQUISITIONS TAX & CERTAIN INTEREST FREE LOANS

Interest free loans have become more common in recent years for various reasons not least of which is the difficulty that people are experiencing getting on to the property ladder and parents opting to help their adult children by advancing interest free loans to them.

Regardless of why the interest free loans are advanced, it is an area that Revenue is interested in and are anxious to gather more information in relation to certain interest free loans. This article looks at a number of recent developments in this area.

Where an interest free loan is put in place, it is important to have a simple loan agreement drafted and executed so that there is supporting documentation available to demonstrate to Revenue that the cash advance is a loan in nature and not a cash gift.

You will be aware that if you receive a gift, or an inheritance, you are potentially liable to Capital Acquisitions Tax (“CAT”).

The interest free use of money is also benefit from a CAT perspective. The value of the benefit arising is calculated having regard to the interest that is foregone by the lender i.e. the amount of interest that they could obtain if they had the funds on deposit instead.

Each individual is entitled to receive a gift up to the value of €3,000 from any number of individuals in any calendar year without having to pay CAT or without those small gifts impacting on the relevant Tax Free CAT Group Threshold. If, for example, both parents advance a loan to their son or daughter and the annual small gift tax exemptions of €3,000 are not otherwise utilised then it is unlikely that the interest free loan would give rise to a taxable benefit currently.

Although interest rates being offered on deposit accounts have improved somewhat recently, they are still relatively low and, therefore, because of the annual gift exemption it is rare that an interest free loan will give rise to an annual taxable benefit but this must be considered each year.

Finance Bill 2021 included proposed amendments which sought to calculate the value of the benefit arising having regard to the cost of borrowing an equivalent amount on the open market rather than the interest that the lender could obtain if the monies were on deposit. The proposed changes were not introduced into legislation.

However, Finance Act 2023 introduced new reporting requirements in relation to certain interest free loans.

The changes are effective from 01 January 2024 and, if relevant, a CAT Return in respect of an interest free loan(s) should be filed with Revenue by 31 October 2025 in respect of loans that were in place in 2024.

A CAT Return will be required where:

A loan is made directly or indirectly between close relatives (note that companies and trusts may also be looked through);
No interest, or below market interest, has been paid on the loan during the calendar year;
No interest has been paid within 6 months of the end of the calendar year; and
At any point in the calendar year the balance on the loans exceeds €335k.

Note that if there is more than one loan, the loans must be aggregated in terms of considering this €335k loan amount. For example, if an individual has a loan of €250,000 from his / her parents and a further loan of €100,000 from an uncle then that individual would be required to file a CAT Return.

Loans to be considered in this regard include:

Loans received by you from a close relative;
Loans received by you from a company of which the beneficial owner is a close relative;
Loans made by a close relative to a company of which you are the beneficial owner;
Loans made between two companies where you are a beneficial owner of the borrowing company and a close relative is a beneficial owner of the lending company.

A close relative, for the purposes of this legislation, is anyone included in Group A or Group B CAT Threshold Groups and only really blood strangers (Group C CAT Threshold Group) are excluded.

The recent changes to tax legislation in this regard do not give rise to any additional liabilities but the changes will provide Revenue with more information in relation to interest free loans. Given the changes that were proposed in Finance Bill 2021 in terms of valuing the benefit arising from having interest free use of money, the cynics amongst us would be forgiven for thinking that further changes are coming down the track in the foreseeable future and such changes will most likely result in a higher value being attributed to the interest free use of money and, therefore, potentially CAT payable.

For those of you with relevant interest free loans in place it may, therefore, be an opportune time to consider if you are in a position to accelerate the repayment of the loans or, if viable, make the loan an outright gift.

Author: Derek Henry, Partner – Head of Tax at BDO and graduate of BA Accounting & Finance & MSc in Accounting at DCU Business School