Dealing with an interest free loan from the Bank of Mum and Dad

Ten years ago, I received a loan of €25,000 from my parents to put into my mortgage, which I duly did. They said to pay it back whenever (with no interest).

I am now in a position to repay the lump sum but after reading many complicated views on loans from parents and gifts, I’m wondering is there any non-compliance in this?

Mr M.C., email

Revenue has an issue with zero interest loans. It is their very clear view than a loan without interest represents a gift – or at least the amount that should have been paid in interest ins a gift.

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However, I don’t think you have anything to fear in this case.

Your parents gave you the money and you are now repaying it, so the €25,000 capital sum is certainly fenced off satisfactorily from a Revenue point of view.

And that niggling issue of the interest? Interest rates over the past decade have been coming down and are now around the 3.5 per cent mark in relation to mortgage loans. A few years ago, that would have been closer to 4.5 per cent.

Technically, then, your parents should be charging you about €875 a year in interest now. That figure would have been closer to €1,125 a few years ago. Clearly, from your own account, that didn’t happen.

However, there is provision in Revenue gifting rules for anyone, such as yourself, to receive up to €3,000 from a parent or anyone else in any given tax year. This “small-gift exemption” can be taken by you every tax year and from a range of different people. So, for instance, you could receive up to €6,000 a year between two parents, and still have no liability to tax.

That small gift exemption more than covers any interest at issue here: you’d need to be paying interest at around 12 per cent or more to breach the small gift exemption on your imputed interest payments.

So, for you, there is no issue at all that I can see.

Of course, things are never absolutely cut and dried with Revenue. What you get on one hand is generally taken away on the other in order to balance the books.

In this case, although your parents didn’t actually charge interest, if you assume the notional interest they should have charged was covered by the small-gift exemption, it still counts as nominal income for them despite their never receiving any payment. And that might well have tax implications for them as it would count as income for them.

Strictly speaking, the Revenue view is that either (a) no interest was charged and the interest is therefore a gift to you, or (b) the interest that should have been charged was taxable income for them.

Do I think Revenue will come after them in a case like this, dating back a decade or so? No. It would almost certainly cost more than they would recover.

However, I think this could be more of an issue for people currently receiving financial support from their parents as they try to buy a home. Revenue has been very proactive in recent years in closing loopholes that have seen some wealthy families supporting their adult children as a form of tax planning.

And recourse to the Bank of Mum and Dad is increasingly a feature of the mortgage market at a time when tighter Central Bank rules and rapidly rising prices mean a diminishing number of people can afford to purchase homes purely via a mortgage – even with the Help to Buy scheme.

And it is not just those who would generally be considered “wealthy” who are helping out their adult kids in this regard. Fiona Reddan’s piece last week showed that cash buyers still account for more than half of the sales in the Irish property market and a significant proportion of that has to be down to parental financial support for their children – largely in the form of cash gifts.

Revenue has an ongoing cycle of special investigations and the more prevalent it feels parental financial support of adult children’s home purchase is, the more likely it is to trigger such an investigation in the future.

I still don’t see them going back a decade. If I were you, I’d pay back the money now and close the book. If the Government does decide to take a more rigorous approach to such loans as part of its attempts to keep a lid on property prices – or get the Revenue to do so on its behalf – it is likely to announce such an intention in advance.

And with the prospect of an election coming into view, it would be a brave minister who would risk the ire of “middle Ireland” by raising this hare just now.

Submit your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice