Q: We want to give our daughter a loan of €350,000 to buy a house. How should we set out the loan, and will she have to pay interest when she is paying it back?
A: How to structure a loan to an adult child is a regular query, says Eoin Tobin, a solicitor, chartered tax adviser and head of private client services at law firm RDJ.
It’s critical that both parent and child understand and agree the terms of the arrangement. He advises using a solicitor to set things out formally in a loan agreement.
“That’s important for family harmony, but also because Revenue may take a jaundiced view of something that isn’t properly documented, viewing it as a familial gift rather than a loan,” he says.
The loan term, the interest, if any, and whether the loan is secured, by a charge on the house being purchased, for example, should all be set out.
Some parents will give a loan and not a gift because they need the money back at some point.
“The term of the loan should make sense to the parties; for example, ‘I need the money for my retirement in 10 years, so let’s put a 10-year term on it’,” says Tobin.
If the money is for a house, the daughter should be aware that banks may be put off lending further funds.
“A bank won’t be happy for anyone else to have an interest in the property by way of a debt,” he says.
Also, a child borrowing money from a parent to buy a new house should know how this might impact their ability to avail of Help to Buy or First Home schemes. The former, for example, requires a mortgage of at least 70 per cent of the purchase price so a large parental loan could, depending on how it is structured, affect eligibility.
The tax implications associated with the family loan also need to be considered.
As a Group A beneficiary, a child has a lifetime tax-free threshold of €400,000 in respect of gifts and inheritances received from parents, meaning they can potentially receive €400,000 from their mother and their father, tax free.
This is one shared lifetime threshold, aggregating all benefits received from both parents, not a separate €400,000 allowance from each parent.
If a parent were to give the daughter an outright gift of €350,000 now, any future gift or inheritance from either parent, exceeding the remaining €50,000 would be liable to capital acquisitions tax (CAT) at 33 per cent.
If, on the other hand, the reader charges a market interest rate on the loan, and it is repaid in full, the CAT threshold would remain intact and the daughter could still potentially receive up to €400,000 tax-free from her parents over her lifetime.
The reader does not necessarily have to charge interest, but an interest-free loan to a child will have CAT consequences.
“There is nothing stopping the parents giving an interest-free loan. That doesn’t mean it isn’t a loan, and that the principal isn’t still repayable. But having no interest on the loan changes the tax rules,” says Tobin.
Where a loan is interest-free, Revenue treats the borrower as receiving a taxable benefit each year the loan remains outstanding, a concept known as a “deemed gift”, he says.
The gift is not the loan itself, but the value of the interest-free benefit the borrower enjoys by not having to pay interest, or by paying less than the market rate.
On interest, in practice, Revenue accepts the highest rate of return the person giving the loan could obtain by putting the funds on deposit as the benchmark for calculating the annual value of that deemed gift.
In plain terms, that means looking at the best available deposit rate the parents could have earned on the money.
“Each year, the daughter has to determine the annual benefit she is deemed to receive because she is not paying any or enough interest,” says Tobin. “It is her responsibility to quantify the value of that benefit and account for it on an annual basis.”
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The deemed gift in any given year is reduced by the annual small gift exemption of €3,000 that a parent can give each year without tax consequences.
So, the daughter would only be treated as receiving a taxable gift to the extent that the total deemed benefits from each parent exceed €3,000 in any given year.
Any such gift would reduce her Group A CAT threshold of €400,000, or, if that threshold has already been exceeded, would be taxable at 33 per cent.
In recent years, the Government proposed amending how a deemed benefit on interest-free and low-interest loans is assessed for CAT purposes.
It looked at shifting from a benchmark from the best available deposit rate to a cost of borrowing rate. This change was not ultimately enacted, but it’s a reminder that the legislative framework in this area is not static, says Tobin.
Will Revenue seek more tax on a gift to my child if tax-free thresholds fall in the future?
“Parents and children should be mindful of this when advancing high-value loans, as any future change to the methodology could result in a significantly higher deemed annual benefit, and consequently, materially increased CAT exposure for the child,” he says.
For 2025 and each subsequent year, there’s a reporting requirement where a person is deemed to take a gift in respect of a specified loan, and the balance outstanding on that loan, when aggregated with any other specified loans, exceeds €335,000 on at least one day in the year.
The daughter’s €350,000 loan clearly exceeds this threshold, so even if no CAT is actually payable, and none may be, given that the deemed annual benefit is likely to fall within her remaining threshold, the arrangement must still be reported annually to Revenue by way of a CAT return, says Tobin.
The reporting requirement now also applies to low-interest loans, not just zero-interest ones. Parents who charge some interest, but below the deemed rate, should not assume that a nominal interest charge removes the child’s reporting obligation.
“Even where there is no tax payable, Revenue wants to see how the interest-free element is being calculated,” says Tobin.
The parents should also be clear about what happens if they die before the loan is repaid.
If their will stipulates that on their death, they don’t want the balance to be repaid, this written-off amount becomes a taxable event, says Tobin.
For example, if the daughter had paid back €50,000 of the €350,000 loan and the balance was forgiven, there is a benefit of €300,000 for the child in addition to anything else she may have received under the estate.
This eats into her €400,000 tax-free inheritance threshold.
Any loan or gift should be considered as part of the parents’ overall estate plan and dealt with in their wills, says Tobin.
Are any other siblings who are beneficiaries aware of the loan?
Parents should consider how the loan, whether repaid, forgiven, or still outstanding, could affect the overall balance of their estate distribution among all of their children, he says.
The name of the reader who submitted the question is not being published to protect the identities of those involved. Please send your legal queries to Joanne Hunt, Ask the Lawyer, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to[email protected] with a contact phone number. This column is a reader service and is not intended to replace professional advice.