Tax implications of giving a loan to sibling.

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demoivre

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I'm considering giving a loan to my sister for her business as she is having difficulty with credit lines. My intention is for the loan to be interest free and repayable at her discretion. What are the tax implications for me and her ?
 
I don't know the tax implications but you must be certain you won't fall out if she cannot repay you. You should consider the worst case scenario before you loan it.
 
You can give your sister a once off gift up to €50k and she would not have to pay any Capital Acquisition Tax on it.

So if the amount is less than €50k, then there are no tax implications.

I would think that an interest-free loan , repayable at her discretion would be aruably a gift. So if you give her a loan of €150k, it could be argued that the €100k is a gift and she would have to pay 25% CAT on it.

My gut feeling is that the Revenue would take a practical view of any such issue as long as it was not being done to evade tax. If you lent her money and she repays you, I don't think that the Revenue would worry too much about it. Especially in these tough business times.

I am assuming that she is a sole trader. If she operates through a company, it's a bit more complicated. You should be looking for security from the company e.g. a charge on the debts, so that you would get paid ahead of other creditors.

If you provide more details, you will get more comprehensive answers.

Many businesses are no longer viable and should be killed off. Make sure that you are not keeping a dead business alive for a few more painful months.
 
Bronte said:
I don't know the tax implications but you must be certain you won't fall out if she cannot repay you. You should consider the worst case scenario before you loan it.
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Thanks, I've thought about the worst case scenario which is that she can't repay me because of unforseen circumstances and if that happens I won't be losing sleep over it.
 
Brendan said:
You can give your sister a once off gift up to €50k and she would not have to pay any Capital Acquisition Tax on it.

So if the amount is less than €50k, then there are no tax implications.

I would think that an interest-free loan , repayable at her discretion would be aruably a gift. So if you give her a loan of €150k, it could be argued that the €100k is a gift and she would have to pay 25% CAT on it.

My gut feeling is that the Revenue would take a practical view of any such issue as long as it was not being done to evade tax. If you lent her money and she repays you, I don't think that the Revenue would worry too much about it. Especially in these tough business times.

I am assuming that she is a sole trader. If she operates through a company, it's a bit more complicated. You should be looking for security from the company e.g. a charge on the debts, so that you would get paid ahead of other creditors.
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Thanks Brendan. The loan would be for €100k and she is a sole trader. I don't see how it can be classed as a gift if it is going to be repayed and I'm aware of the gift threshold you mentioned. Naturally though I want to avoid any tax liability if possible so to ensure that the money is not classed as a gift would I be better to charge her a nominal interest rate such as maybe 0.5% per annum ?
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Brendan said:
. Make sure that you are not keeping a dead business alive for a few more painful months.
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This is a very important point as well, particularly as you are willing to loan such a substantial amount.

Is she making a profit? Why won't a bank loan her the 100K? - are also some pertinent questions.

Maybe you could telephone revenue for the tax implications as no one has been able to advise you on this, a legal agreement with your sibling should also be considered.
 
If she repays it, you will be ok.

A market rate would be around 5%, so if it's interest free, you are giving her a gift of €5,000 a year, which is withing the threshold.

If you write it off, it would be a gift of the full amount and so subject to CAT.
 
You should consider asking your sister to incorporate a company rather than give her a loan as a sole trader. If you give the loan to the company it would avoid any CAT liability for your sister and the repayment of the loan would be tax free in your hands. You could also become a director/shareholder in the company and at least you would have some recourse in the event that your sister/the company was unable to repay the loan.

A company incorporation and registration costs on average about €500. Considering the amount of money involved it would be a small price to pay.

Bear in mind what the previous poster said about pumping cash into a business that's dead on arrival.
 
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Hi censuspro

Incorporating a company is a good idea from a tax point of view. However, I think that the chances of a tax charge are low here, so I would not incorporate.

The administrative hassle, with annual returns etc, is just too much for a small business.

There may be other reasons for incorporating, but don't do it just to avoid this small chance of a tax bill.

Brendan
 
I mentioned this in passing to a solicitor who gave the very good advice of asking your sister to give you a cheque for €100k post-dated to the scheduled date of repayment of the loan - say one year hence.

Then there is no dispute that it was other than a loan.

I fully understand that you think that this is unnecessary, but families do fall out over small things. Having complete clarity is the best insurance against a subsequent row.

In the unlikely event of your sister dying in the meantime, you will also have proof of her debt to you.

Brendan
 
Thanks to everyone for the replies. The post dated cheque is an excellent idea and as you say Brendan it removes any doubt about the money being a loan. Thanks again for the input folks.
 
At first, there are no tax implications. However, if you do not seek repayment or interest within a certain period of I think 3 years the loan can be deemed a gift. This creates CAT liabilities depending on the value.
The solicitor is right that you must create evidence that it was a loan.

John Conlon

[broken link removed]
 
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