Gifts, loans and getting on the housing ladder

What would happen if I gave my son €100,000 towards his first home purchase and we entered a short loan agreement to paper that it was at a nominal interest (which based on your advice is not going to become an issue in 2022). However, could we agree that only €40,000 of the total €100,000 was actually a loan and the son wouldn’t pay back the €60,000 balance at all?

While Revenue would not (I assume) know whether this balance was paid back or not, I assume that, once I die, that technically my estate would have claim to that outstanding €60,000 that was never repaid?

Or would there be an obligation at that point for my son to declare it as a gift with the Revenue, thus reducing their lifetime inheritance threshold by €60,000?

Is there a way to offset that balance using the annual small gift exemption ie. €3,000 per year each from my wife and I (so €6,000 pa to my son)?

Covering gaps in my PRSI record to maximise my pension

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Will my children inherit their dead mum’s share from grandparents?

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Is Government clamping down on preferential loans to adult children?

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Exactly what expenses can you set against capital gains before tax?

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Mr T.C., email

People can overthink these things sometimes and I find it is always best to keep things simple. First priority is what do you want to do/where is the need greatest? Second, as a follow-on, can you do that? Only then, thirdly, is how best to use the rules available to do whatever it is in the most tax advantageous position.

I realise such sentiments are anathema to the army of financial advisers out there whose livelihoods are predicated on maximising return and minimising tax exposure but most people’s financial affairs are really much simpler.

In this case, you want to help your son out by giving him €100,000 to allow him get over the line and purchase his first home. This is a time when he really needs a financial boost – rather than letting him be frustrated in his ambitions now as you hold on to your assets until you die when, hopefully, he will be financially secure and settled and not in anything like as much need.

And, of course, you’re in the fortunate position of having the financial wherewithal to consider such a move.

So those are the first two questions answered? Give the man the €100,000 and let him buy his home.

Only now do we come to the third part. Is there a way of doing this that is more financially beneficial to either or both of you? And there is.

Gift or loan

There are two primary options here: gift the money to your son or give it to him as a loan.

If you gift the money, that’s pretty straightforward. He will have no tax to pay as he can receive up to €335,000 from his parents over his lifetime. Yes it will reduce what he can receive tax-free at a later stage but then the purchase of your first home is about the biggest financial commitment any person will make. So it is quite likely that receiving the gift/part of his inheritance (whatever way you like to see it) now will be of the greatest benefit to him.

From your side, obviously, there is no tax involved in such a move as long as you do not have to liquidate assets to meet the financial commitment – which would leave you open potentially to capital gains tax liability.

There is nothing to stop you giving the money to your son as a loan. Tax law and practice allows for family loans as long as the person making the loan charges a rate of interest at least matching the rate they could secure on that money in a demand deposit account. As you say, right now that is zero so no interest would apply.

However, €100,000 – or even the €60,000 in your part-loan scenario – would unlikely be repaid within a year or two and savings rates will rise eventually. In that scenario, the interest charged to your son would also need to rise or the interest forgone would be seen as a gift in itself.

Also, the Government was tempted to adjust that rate of interest benchmark to match it to the best rate your son could borrow that money in the commercial market. That would make the cost of the loan/gift much higher.

For now, the Government has stepped back from this idea, pulling the provision from the Finance Bill 2021, but having seen the light of day, it may return at a later date. The Minister simply said it needed greater consideration.

Whatever the rules on family loan interest, they will affect any loan still open at the time. You cannot set a zero interest rate at the loan's outset – regardless of the length of the loan – just because that is the prevailing rate at the time.

But then we come to the small gift exemption. As you say, there is nothing to stop you (and your wife) each giving this son a gift of up to €3,000 a year without any tax implications – so €6,000 between you.

This money can be used to offset any interest payable on the loan and even the capital itself up to that financial limit each year which would be a way of “paying down” any loan – at least until you die.

Lump-sum gift

Clearly once you die, you can no longer make annual small gifts to the son, so whatever sum was left on the loan at that stage would likely convert to a lump-sum gift to your son. Technically, whoever is executor of your affairs must clarify all outstanding assets and debts, so they would need to be aware of and include any family loan.

Capital acquisition tax is self-assessed, so if the money became a gift on your death, it would be a case of your son declaring the gift as the affairs of your estate were being dealt with. As any gift – even of €100,000 – would not hit 80 per cent of the relevant €335,000 inheritance/gift tax threshold, there would be no need for your son to notify Revenue otherwise of its existence – at which stage it will be set against his lifetime tax-free limit.

If you say nothing, will Revenue know? Maybe. More likely not, unless they start auditing things. But how comfortable are you/your son with having to keep one eye looking over your shoulder all the time, just in case? That’s a call for you.

Finally, you don’t have to decide now to assess how much of this €100,000 is a gift and how much a loan. It can all be a loan for now, with the small gift exemption used to pay it down over time – assuming you live that long. If you don’t, whatever remains on your death(s) becomes a gift. That maximises the potential for your son’s tax-free threshold.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into