Gifts, loans and climbing the housing ladder

What if I gave my son $ 100,000 for his first home purchase and we entered into a short-term loan agreement to certify that it was at nominal interest (which, in your advice? , will not become a problem in 2022). However, could we agree that only € 40,000 of the total of € 100,000 was in fact a loan and that the son would not pay off the balance of € 60,000 at all?

While Revenue doesn’t know (I guess) whether this balance was paid off or not, I guess once I’m dead, technically my estate would be entitled to those $ 60,000 overdue that was never paid back?

Or would there be an obligation at that time for my son to declare it as a donation to the tax authorities, thus reducing his threshold for life inheritance by € 60,000?

Is there a way to compensate for this balance by using the annual exemption of small gifts, that is to say 3,000 € per year each of my wife and me (therefore 6,000 € per year for my son) ?

Mr TC, email

Sometimes people can overthink these things and I find it’s always best to keep it simple. The first priority is what do you want to do / where is the greatest need? Second, as a follow-up, can you do that? Only then, third, how to best use the available rules to do whatever is in the most tax advantageous position.

I realize that such sentiments are anathema to the army of financial advisers whose livelihood is based on maximizing returns and minimizing tax exposure, but most people’s financial affairs are really a lot. simpler.

In this case, you want to help your son by giving him 100,000 € to allow him to take the plunge and buy his first house. This is a time when he really needs a financial boost – rather than letting him get frustrated in his ambitions now as you hold onto your assets until you die when, hopefully, he’s safe. financial and installed and not so much. need.

And, of course, you are fortunate to have the financial means to consider such a move.

So these are the first two questions answered? Give the man the $ 100,000 and let him buy his house.

We are only now coming to the third part. Is there a way to do this more financially beneficial for one or both of you? And here.

Donation or loan

There are two main options here: offer the money to your son or give it to him as a loan.

If you donate money, it’s pretty straightforward. He will not have to pay any tax because he can receive up to € 335,000 from his parents during his lifetime. Yes, that will reduce what he can receive tax-free at a later stage, but buying your first home is the biggest financial commitment a person can make. So it is very likely that receiving the gift / part of his inheritance (whatever perspective one gives him) now will be of most benefit to him.

On your side, of course, there is no tax involved in such a move until you have to liquidate assets to meet the financial commitment – potentially exposing you to capital gains tax. .

Nothing prevents you from lending money to your son. Tax law and practice allow family loans as long as the person making the loan charges an interest rate at least equal to the rate they could get on that money in a demand deposit account. As you say, right now it’s zero, so no interest would apply.

However, $ 100,000 – or even $ 60,000 in your partial loan scenario – would be unlikely to be repaid in a year or two, and savings rates will eventually rise. In this scenario, the interest charged to your son would also increase or the lost interest would be considered a gift in itself.

Additionally, the government has been tempted to adjust this benchmark interest rate to match the best rate your son could borrow this money from in the commercial market. This would significantly increase the cost of the loan / grant.

For now, the Government has taken a step back on this idea, withdrawing the provision from the 2021 budget bill, but having seen the light of day, it could come back at a later date. The minister simply said that more consideration was needed.

Whatever the rules on family loan interest, they will affect any loan still open at the time. You can’t set a zero interest rate at the start of the loan – regardless of the length of the loan – just because that’s the rate in effect at that time.

But then we come to the exemption for small gifts. As you say, nothing prevents you (and your wife) from each offering this son a gift of up to € 3,000 per year without any tax implications – so € 6,000 between you.

This money can be used to offset the interest owed on the loan and even the principal itself up to that financial limit each year, which would be a way to “pay off” any loan – at least until your death.

Lump sum gift

Obviously, once you die, you can’t give the son small annual gifts anymore, so any money left over on the loan at this point would likely convert to a lump sum gift to your son. Technically, whoever is the executor of your affairs should clarify all overdue assets and debts, so they should be aware and include any family loans.

The capital acquisition tax is self-assessed, so if the money became a gift when you died, your son would report the gift while the affairs of your estate were being processed. Since a donation – even € 100,000 – would not meet 80 percent of the inheritance / gift tax threshold of € 335,000, there would be no need for your son to notify the tax administration of its existence – at what point it will be counted against its lifetime tax exemption limit.

If you don’t say anything, will Revenue know? May be. More likely not, unless they start auditing things. But how comfortable are you / your son having to keep an eye over your shoulder all the time, just in case? It is a call for you.

Finally, you don’t have to decide now to assess how much of that $ 100,000 is a donation and how much a loan. Everything can be a loan for now, with the small gift exemption used to pay it off over time – assuming you live that long. If you don’t, whatever is left over when you die becomes a gift. This maximizes the potential of your son’s tax exemption threshold.

Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reading service and is not intended to replace professional advice. No personal correspondence will be exchanged

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