Capital Acquisitions Tax on loan from parent.

The_Pete_Fella

Hi All,

I'm considering taking a loan from a parent for the price of a mortgage with the intention of paying it back over the course of 24 years with a little interest on top. if the interest is within the Capital Acquisitions Tax limit of 30K is there any other tax liable on the loan for both parties involved?

Thanks for any help,

Pete

nompere

You want to get into a tax avoidance exercise. That's ok - it's not illegal (yet!) but Revenue scrutinise that sort of thing very closely. Getting it wrong is very expensive. So talk to a professional tax consultant.

seamus

Yeah, it's weird one that you'll need to talk to a tax consultant and a solicitor about.

As it's effectively a mortgage loan, you both may be required in order to avoid tax implications, to play bank and enter into a proper agreement, inclusive of life assurance, parents' name on the deeds, etc etc.

As said, going it alone and getting it wrong can work out very expensive if Revenue decide in five years that they disagree with your "interpretation" and issue a hefty tax bill.

The_Pete_Fella

Thanks Guys,

I have every intention of getting it drawn up by a solicitor etc should i go ahead but I was looking to see was it feasible first and if anyone has a similar arrangement in place. It’s not a tax dodging exercise as the funds are in fact my father’s pension pot so I will have to pay him back. it’s more of a banks compounded interest dodging exercise.

My general theory behind it is if I can offer my father a 10% return on his investment it’s a bonus for him and for me it means on a loan of 300K I only pay back 330K instead of over 500K to the bank.

barneystinson

For starters the difference between the amount of interest in your agreement and the amount of interest you'd pay on an arms length loan in each year, will be a gift.

http://www.revenue.ie/en/tax/cat/guide/free-property-loans.html

AlexisM

The_Pete_Fella wrote: »

paying it back over the course of 24 years with a little interest on top.

The_Pete_Fella wrote: »

My general theory behind it is if I can offer my father a 10% return on his investment it’s a bonus for him

A 10% total return over 24 years is a bonus for him? Really? Has he got 300K sitting there earning literally nothing?

Returning 330K to your father evenly over 24 years (13,750 p.a. repayment) on his initial 'investment' of 300K would give him a return of less than 0.8% p.a. With 300K, I'm sure he could do better than this elsewhere, even after tax - so I really don't see how you consider this a 'bonus' to him?

strettie

Have to agree with AlexisM even on some of the lower paying state savings schemes your father could potentially earn €110,000 tax free & no risk on that 300,000 over a 24 year period

deruler

With regard to what rate of interest to use, below is an extract from Revenue's own CAT manual

19.14 Free loans - Section 40 CATCA 2003
Where a person receives a loan of money at a Nil rate of interest, the Revenue view is that the best price referred to in section 40 (3) CATCA 2003 is the highest price a prudent lender/depositor could get in the open market from prospective prudent borrowers.

In practice, Revenue would accept the highest rate of return the person making the loan could obtain on investing the funds on deposit.

barneystinson

deruler wrote: »

With regard to what rate of interest to use, below is an extract from Revenue's own CAT manual

19.14 Free loans - Section 40 CATCA 2003
Where a person receives a loan of money at a Nil rate of interest, the Revenue view is that the best price referred to in section 40 (3) CATCA 2003 is the highest price a prudent lender/depositor could get in the open market from prospective prudent borrowers.

In practice, Revenue would accept the highest rate of return the person making the loan could obtain on investing the funds on deposit.

It's an interesting one because the way I'd view it is, if there's an agreement there that says it'll be 13,750 p.a. for 24 years in return for 300k upfront, then to find the market rate you'd have to compare it to a fixed term annuity type product?

You couldn't really justify simply taking the market deposit rate in the circumstances outlined.

Alan Shore

barneystinson wrote: »

It's an interesting one because the way I'd view it is, if there's an agreement there that says it'll be 13,750 p.a. for 24 years in return for 300k upfront, then to find the market rate you'd have to compare it to a fixed term annuity type product?

You couldn't really justify simply taking the market deposit rate in the circumstances outlined.

I'd agree but the rate would still be significantly lower that the rate on a loan which was referred to in the other Revenue article.

BOHSBOHS

that Revenue CAT manual is incorrect!!

the legislation is all that matters

its got nothing to do with the lender of the money and their deposit foregone


its all about the beneficiary

the legislation mentions best price obtainable for "such use "

if you used the loan to buy a property
best mortgage rate available say 4%
if just a standard loan
best loan rate available say 12%

barneystinson

BOHSBOHS wrote: »

that Revenue CAT manual is incorrect!!

the legislation is all that matters

its got nothing to do with the lender of the money and their deposit foregone


its all about the beneficiary

the legislation mentions best price obtainable for "such use "

if you used the loan to buy a property
best mortgage rate available say 4%
if just a standard loan
best loan rate available say 12%

I think you're misreading it:
"A gift referred to in subsection (2) 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 person referred to in sub- section (2) for such use, occupation or enjoyment, and the best price obtainable in the open market for such use, occupation or enjoyment."

What's relevant here is the market value of the asset the beneficiary has the use of. In this case they have the use of the 300k. The market value of having the use of the 300k isn't the rate at which they would otherwise have to borrow it, it's the value that the owner of the asset (daddy) could have obtained for it (deposit rate, or in this case annuity rate).

carveone

barneystinson wrote: »

For starters the difference between the amount of interest in your agreement and the amount of interest you'd pay on an arms length loan in each year, will be a gift.

This may not help but I'd like to add that you can receive 3000 euro per year from anyone as a gift tax free. Thus (in my opinion of course!) you can at least deduct 3000 euro from that gift from interest.

BOHSBOHS

barney

the benefit arises to the son
the best rate obtainable is the commercial rate for the loan had the son (prudent borrower) obtained it in the open market from normal sources (prudent lender) (you linked to the Revenue site earlier)

daddy isnt mentioned in the legislation the benefit does not arise to him. im not sure what why his deposit rate is relevant.

the only reference for using a deposit rate appears to stem from a popular CAT book itself an interpretation of the legislation.(some parts of the CAT manual appear to be "ahem" lifted from the book)
The author of the book decides that a commercial rate of interest would not be fair to charge as the lender is not a bank !
(I wonder if i could use that logic to charge 1% on directors loans instead of 13.5%!!! haha )

dogsears

BOHSBOHS wrote: »

barney

the benefit arises to the son
the best rate obtainable is the commercial rate for the loan had the son (prudent borrower) obtained it in the open market from normal sources (prudent lender) (you linked to the Revenue site earlier)

daddy isnt mentioned in the legislation the benefit does not arise to him. im not sure what why his deposit rate is relevant.

the only reference for using a deposit rate appears to stem from a popular CAT book itself an interpretation of the legislation.(some parts of the CAT manual appear to be "ahem" lifted from the book)
The author of the book decides that a commercial rate of interest would not be fair to charge as the lender is not a bank !
(I wonder if i could use that logic to charge 1% on directors loans instead of 13.5%!!! haha )

For sure the legislation rather than any book etc is the source of the law, however legislation often requires interpretation.

In this case, if you take a simple situation where a person pays no interest the legislation could be simplified as "A gift is deemed to consist of a sum equal to the best price available in the open market for such use, occupation or enjoyment".

i.e the use, occupation or enjoyment of daddy's money. Its in this sense that you need to get an idea of what daddy or anyone else could get for the money even though what you are measuring is the benefit to the son.

So how much could daddy (or anyone) get for that in the market - the only real market for him is the deposit market and that is why the books say what they do and why the Revenue guidance notes are perfectly reasonable and don't conflict with the legislation. So I agree with Barney on this.

NB Although historically this is an example of a rule "more honoured in the the breach than the observance" I do know of a recent case where agreement with Revenue was reached on a rate of just a fraction over 1% based on evidence of deposit options gathered from a variety of financial institutions.

barneystinson

dogsears wrote: »

For sure the legislation rather than any book etc is the source of the law, however legislation often requires interpretation.

In this case, if you take a simple situation where a person pays no interest the legislation could be simplified as "A gift is deemed to consist of a sum equal to the best price available in the open market for such use, occupation or enjoyment".

i.e the use, occupation or enjoyment of daddy's money. Its in this sense that you need to get an idea of what daddy or anyone else could get for the money even though what you are measuring is the benefit to the son.

So how much could daddy (or anyone) get for that in the market - the only real market for him is the deposit market and that is why the books say what they do and why the Revenue guidance notes are perfectly reasonable and don't conflict with the legislation. So I agree with Barney on this.

NB Although historically this is an example of a rule "more honoured in the the breach than the observance" I do know of a recent case where agreement with Revenue was reached on a rate of just a fraction over 1% based on evidence of deposit options gathered from a variety of financial institutions.

Agreed, with the exception that in this case the OP is talking about entering into a written agreement as to the repayment term and amounts, so unlike the case of the normal informal interest-free loan, there is a financial instrument being entered into. The question is therefore what value would daddy have obtained in the open market for entering into such an arrangement, and the rate is probably a bit higher than a fraction over 1%. But probably not by so much as to put a sizeable dent in a Group 1 Threshold, after deducting the first 3k.

BOHSBOHS

I still dont see why in measuring the benefit to the receiver
you would use the opportunity cost of the giver.

It isnt done for loans across any other taxhead.

If it is "Revenue practice" to accept a deposit rate in this instance
it appears an anomalous situation.

Id imagine someone made a case for the deposit rate and legislation wording being unclear and Revenue weren't too bothered about challenging it.
(wouldnt be surprising given the low importance placed on CAT and the relatively low amount of tax at risk overall, especially after thresholds and the 3000 possibly 6000! SG Exemption as pointed out by barneystinson)

Perhaps the law could be made clearer .......:p

In the op's situation where he is properly paying back the capital then only the interest will be seen as a gift. So even if he only paid the capital back he would only be taxed at a rate of 33% on the interest. He can receive 3k tax free every year (6k if the money can be given from a both parents) and (provided he hasn't received gifts in the past) he should have 225k tax free from a parent. Don't see how he could end up with any tax bill at all taking all this into account, Id imagine he would hardy even use much of his group A threshold.