I know that this question has been posed before on this forum, but is anyone certain what rate should be used to calculate the notional interest foregone by a lender who provides an interest-free loan to a family member, which Revenue treats as a gift? Finding a clear answer isn’t easy.
The Revenue website states: “If you receive an interest-free loan, this is a benefit, and you may have to pay tax on it. The value of the benefit is the rate of return the funds would generate if they were invested on deposit.” However, it doesn’t specify the type of deposit or the bank.
Revenue link
In a Dáil Debate last November, Minister for Finance Michael McGrath implied that the applicable rate was the highest deposit rate available:
McGrath’s response aligns with section 40 of the Capital Acquisitions Tax Consolidation Act 2003, which states that a tax-free loan “is deemed to consist of a sum equal to the difference between the amount of any consideration in money or money’s worth, given by the [lender] for [...] use, occupation or enjoyment, and the best price obtainable in the open market [my italics] for such use, occupation or enjoyment”:
Irish Statute Book link
However, in practice, this doesn’t seem to be strictly enforced. A recent Irish Times article on family loans states that “you will need to ensure you are charging at least your own bank’s demand deposit rate – which may change from time to time.”
Irish Times link
Suppose, for example, that a parent with a Bank of Ireland account extended an interest-free loan of €240,000 to a child to be repaid over two decades in monthly installments of €1,000. Applying the Bank of Ireland’s demand deposit rate as of August 2024 of 0.10%, the notional interest over the first year would total less than €240. Could the parent then effectively gift their child additional money by including a provision in the promissory note to reduce the remaining loan balance annually by an amount lower than the unused small gift exemption, say by €2,000, thereby realizing additional tax savings and decreasing the loan term from twenty years to seventeen? Or would the fact that no actual cash would change hands in such an arrangement mean that Revenue would not permit it?
The Revenue website states: “If you receive an interest-free loan, this is a benefit, and you may have to pay tax on it. The value of the benefit is the rate of return the funds would generate if they were invested on deposit.” However, it doesn’t specify the type of deposit or the bank.
Revenue link
In a Dáil Debate last November, Minister for Finance Michael McGrath implied that the applicable rate was the highest deposit rate available:
In the case of an interest-free loan, the person who receives the loan is deemed to take a gift for CAT purposes in each year they have the benefit of the loan. The gift is the interest-free element of the loan rather than the loan itself. The person will self-assess the value of this gift in determining whether or not any liability to CAT arises.
For example, in the case of a two-year loan of €335,000 from parent to child, the best deposit interest rate available in the Irish market is currently around 3%. Based on this notional deposit interest rate of 3%, the value of the interest-free element of the loan is €10,050 for one year. After deducting the small gift exemption of €3,000, CAT will be due on the balance of €7,050 at the rate of 33%, provided that this amount, when aggregated with the value of any prior gifts or inheritances from within the Group A threshold, exceeds €335,000.
McGrath’s response aligns with section 40 of the Capital Acquisitions Tax Consolidation Act 2003, which states that a tax-free loan “is deemed to consist of a sum equal to the difference between the amount of any consideration in money or money’s worth, given by the [lender] for [...] use, occupation or enjoyment, and the best price obtainable in the open market [my italics] for such use, occupation or enjoyment”:
Irish Statute Book link
However, in practice, this doesn’t seem to be strictly enforced. A recent Irish Times article on family loans states that “you will need to ensure you are charging at least your own bank’s demand deposit rate – which may change from time to time.”
Irish Times link
Suppose, for example, that a parent with a Bank of Ireland account extended an interest-free loan of €240,000 to a child to be repaid over two decades in monthly installments of €1,000. Applying the Bank of Ireland’s demand deposit rate as of August 2024 of 0.10%, the notional interest over the first year would total less than €240. Could the parent then effectively gift their child additional money by including a provision in the promissory note to reduce the remaining loan balance annually by an amount lower than the unused small gift exemption, say by €2,000, thereby realizing additional tax savings and decreasing the loan term from twenty years to seventeen? Or would the fact that no actual cash would change hands in such an arrangement mean that Revenue would not permit it?