Many will be familiar with the lifetime tax-free thresholds for Capital Acquisitions Tax (“CAT”) purposes that exist for gift and inheritance and the obligation to file returns with Revenue where gifts and inheritances are received. Since the 1st of January 2024, there is a third situation in which an obligation to report to Revenue arises, albeit there may not be a liability. This third category is where a loan, or series of loans, are advanced between family members; namely one’s parents, civil partners, lineal ancestors or descendants or with specified family member’s companies.
Often, family members may assist each other, for example in the private financing of the purchase of a home by a child, at a more favourable interest rate (or no interest rate) than would otherwise be available in the mortgage market. Until the 1st of January 2024, where such loans were made between family members there was no obligation to report same to Revenue.
With the commencement of Section 80 of the Finance (No. 2) Act, 2023, an obligation to report to Revenue has been created where loans between such parties have been advanced and the loan (or the aggregate of the loans) exceed €335,000 in the relevant calendar year. If there is a “free use” element to such a loan, a liability to account for same will likely arise. The “free use” element relates to any amount of the loan that is: –
- not subject to interest;
- is at a reduced interest rate; or
- in instances where no interest has in fact been paid.
Now, such loans must be reported to Revenue and where there is a “free use” element, the interest not charged/paid on this element will be taken to be a gift for the purposes of CAT. As the bar to report to Revenue (€335,000) is the same as one’s current Category A threshold, a liability will in all likelihood arise for any “free use” element.
Where parties are considering making such a loan(s) exceeding €335,000, they should consider the following: –
- agree an interest rate that is not so low that it may be regarded as a “free use” element;
- be mindful that the failure by the beneficiary to actually pay interest will likely result in the interest not charged/paid being accountable for CAT;
- enter into a formal loan agreement so that all parties (including Revenue) are aware of the terms of the loan.
Should you wish to discuss this topic more, please contact Colm Tobin, Associate Solicitor, of our Property Department by email at firstname.lastname@example.org