test yourself: tricky loan tax question

businessdit

HI folks -

I want to buy a house off my parents.
Its market value is 700k.

Am I right in saying that it can be structured like this to meet the market value:

- €240k (mortgage and savings)
- €310k (classified as a gift from alive parents.)
- €150k (loan from parents which I will pay back over 5 years [30k per year])

It's the last bit that I am confused about. They won't be giving me a physical loan of the €150k but will expect I pay them the €150k back as this figure brings us up to market value to keep everything straight with tax. In revenues eyes I am aware that I will owe them interest of 6k per year (€150k x 4% per annum) on the sum but this interest will be classified as a tax free gift of 6,000 per annum from them to me which is within the threshold of 3000euro per parent per year.

Does this work this way or can the loan repayment only be for a loan of cash?

Thanks
Alan

scheister

businessdit wrote: »

HI folks -

I want to buy a house off my parents.
Its market value is 700k.

Am I right in saying that it can be structured like this to meet the market value:

- €240k (mortgage and savings)
- €310k (classified as a gift from alive parents.)
- €150k (loan from parents which I will pay back over 5 years [30k per year])

It's the last bit that I am confused about. They won't be giving me a physical loan of the €150k but will expect I pay them the €150k back as this figure brings us up to market value to keep everything straight with tax. In revenues eyes I am aware that I will owe them interest of 6k per year (€150k x 4% per annum) on the sum but this interest will be classified as a tax free gift of 6,000 per annum from them to me which is within the threshold of 3000euro per parent per year.

Does this work this way or can the loan repayment only be for a loan of cash?

Thanks
Alan

The interest on the loan is not the rate you would pay on a commercial loan but the rate they would get for the money. so you are looking at the deposit interest rates which are .25-2% depending on the account. I would also make draw up a loan contract for the €150k to be on the safe side as well stating the facts in case questions are asked down the line.

barneystinson

It's not a loan though, is it, it's just deferred consideration?

As I'm reading it, you're buying a 700k property from your parents for 390k, with 240k paid up front and 150k deferred.

businessdit

scheister wrote: »

The interest on the loan is not the rate you would pay on a commercial loan but the rate they would get for the money. so you are looking at the deposit interest rates which are .25-2% depending on the account. I would also make draw up a loan contract for the €150k to be on the safe side as well stating the facts in case questions are asked down the line.

barneystinson wrote: »

It's not a loan though, is it, it's just deferred consideration?

As I'm reading it, you're buying a 700k property from your parents for 390k, with 240k paid up front and 150k deferred.

Thanks both for the replies and further info, it's much appreciated. Yes we will be working with an accountant and solicitor to make sure that all of this is above board, drawn up and as straight forward as possible.

I suppose I am just checking to make sure that this is all legal and can be done before getting things rolling. I had never heard of deferred consideration but yes, it sounds like that's a more accurate term.

I am also wondering if I will own the house straight away even though I will be paying off the mortgage and the deferred consideration to my parents.

Also will there be CGT or other tax implications for my parents?
The owe about 240k on the house themselves.

Thanks!

businessdit

barneystinson wrote: »

As I'm reading it, you're buying a 700k property from your parents for 390k, with 240k paid up front and 150k deferred.

Yes you're reading it right, that's what I'm doing, but unsure if it's even legal or will have tax implications.

barneystinson

businessdit wrote: »

Yes you're reading it right, that's what I'm doing, but unsure if it's even legal or will have tax implications.

Why wouldn't it be legal?

If it's legal for them to give (i.e. gift) it to you, how could it not be legal for them to sell it to you at whatever price you agree?!

From a tax perspective obviously particular rules apply when transactions are not conducted at arms length. Basically, your parents will be deemed to have disposed of the house at its full open market value, and any tax liabilities calculated accordingly.

Likewise, you're liable to stamp duty on the full open market value.

businessdit

barneystinson wrote: »

Why wouldn't it be legal?

If it's legal for them to give (i.e. gift) it to you, how could it not be legal for them to sell it to you at whatever price you agree?!

I always thought that they legally had to sell a house for around about the market value.

barneystinson wrote: »

From a tax perspective obviously particular rules apply when transactions are not conducted at arms length. Basically, your parents will be deemed to have disposed of the house at its full open market value, and any tax liabilities calculated accordingly.

Likewise, you're liable to stamp duty on the full open market value.

So they will pay CGT as if they sold the house at 700k even though they are only receiving about 400k for it..?

Thanks