Known as the bank of mum and dad, such low interest loans are frequently used by families looking to give a financial hand-up to children when it comes to big ticket purchases, such as cars, home purchase or renovations.
Although tax law does not oblige family members to charge one another interest on loans, the value of the interest that the parent forgoes by lending the money rather than saving it has been seen as a taxable benefit.
“Where a child receives a loan from a parent for which they pay nothing” – which is to say as an interest-free loan – “or where they pay interest at a rate less than the open-market interest rate, the annual value of the loan to the child may be treated as a taxable gift in each year that the loan is in place”, a Revenue spokeswoman said.
That taxable benefit is set against a lifetime tax-free limit on gifts and inheritances if it amounts to more than €3,000 in any given year.
The Finance Bill, which puts into legal force measures announced in the budget and which is currently going through the Oireachtas, had amended the existing rules so that “the best price obtainable in the open market for the use or enjoyment of money shall be equal to the best price obtainable of borrowing an equivalent amount of money in the open market”.
That means it would be assessed against the cost of borrowing the same money froom a bank or credit union. Until now, the benchmark rate has been the rate available on savings in an Irish bank. However, with interest rates on savings now hovering around zero, the Finance Bill had looked to change the benchmark.
In a statement on Friday, the Minister for Finance, Paschal Donohoe, said he had decided “not to proceed with section 62 of the [Finance] Bill relating to the tax treatment of interest-free or low interest loans as he believes greater consideration needs to be given to the proposal”.
That “consideration” will have to address several complexities in determining which bank lending rate should be used in assessing the interest forgone by the parent.
Interest rates on loans are affected by multiple variables. These include whether you are borrowing for a mortgage or a general personal loan. Mortgage interest rates are also affected by the financial position of the borrower and the amount they wish to borrow as a proportion of the property price and the period for which the interest rate in fixed.
The proposed measure had been criticised by people in the financial services and advisory sectors as being unduly complex and unworakable.