How does a loan from the bank of Mam and Dad work?

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Fisoon

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If my parents want to loan me say for example €400,000 to aid in the purchasing of a house. How does this work?

All parties write on a piece of paper that it is an interest free loan and can be repaid in any number of installments at any time and both parents sign it?

Is it possible to give interest free loans? If this is completely repaid would I be correct in assuming that once repaid it would not effect the 335,000 gift threshold by which after this inheritance tax must be paid.

Alternatively if my parents wanted to give me a gift of 335,000 inheritance, would this be a better solution rather than the loan option?

Thanks
 
You would be subject to CAT on the notional interest.

But the notional interest would be about 2% of €400k or €8k a year. With 2 small gift exemptions, you would be using up only €2k a year of your CAT threshold.

You should do it more formally than a piece of paper if it's a loan.

If you enter into a relationship and he claims a share in the house, it would be useful to have a formal mortgage. But that would cost about €1,500 to put in place.

It would mean that if you sell the house, you would have to repay the loan first.

But a lot depends on what you are trying to do.

The simplest is that they give you a straight gift of the CAT threshold amount anyway. They could gift you €6,000 a year after that.

This might work out most tax-efficiently in the long run. For example, CAT thresholds might be reduced. Of if you have used up your CAT threshold and they want to give you another large gift in the future, if they gift you an asset on which they pay CGT, you would get a credit against your CAT liability on that transaction.

But if you have siblings, they might prefer a loan.

First decide what they and you want to do and then work out the tax consequences.

Brendan
 
Brendan Burgess said:
You would be subject to CAT on the notional interest.

But the notional interest would be about 2% of €400k or €8k a year. With 2 small gift exemptions, you would be using up only €2k a year of your CAT threshold.

You should do it more formally than a piece of paper if it's a loan.

If you enter into a relationship and he claims a share in the house, it would be useful to have a formal mortgage. But that would cost about €1,500 to put in place.

It would mean that if you sell the house, you would have to repay the loan first.

But a lot depends on what you are trying to do.

The simplest is that they give you a straight gift of the CAT threshold amount anyway. They could gift you €6,000 a year after that.

This might work out most tax-efficiently in the long run. For example, CAT thresholds might be reduced. Of if you have used up your CAT threshold and they want to give you another large gift in the future, if they gift you an asset on which they pay CGT, you would get a credit against your CAT liability on that transaction.

But if you have siblings, they might prefer a loan.

First decide what they and you want to do and then work out the tax consequences.

Brendan
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Thank you Brendan for your response. I hope I can ask you to clarify some points for me, they passed over my head a little.
1) What is this notional interest rate? Is it like a set rate that all personal loans fall under, can parents not choose to charge any interest on the loan if they want?

2) If you suggest using two small gift exemptions of 3k each then the balance of 2k could come of the CAT threshold or alternatively I could make a 2k or more interest repayment to my parents to pay back the loan thus not effecting the CAT threshold, would that be correct?

3) A straight 335k inheritance could be given now and 6k per year thereafter, I understand this point. Do you believe that the 365k threshold will be reduced in years to come?

4) The last point has me lost. If they give the gift of 335k the threshold has then been reached. What does it mean if they gift an asset on which they pay CGT, you would get a credit against your CAT liability on that transaction? I can't quite grasp this.

If they had a property or stock portfolio that was transferred to me on their death. Would they have to pay CGT on their property which would have grown massively in value? Would they have to pay CGT on their stock portfolio or would the total value of all be transferred and if the total amount is above the threshold then anything above the threshold would be taxed the at CAT rate of 33%?

Thanks again.
 
Fisoon said:
1) What is this notional interest rate? Is it like a set rate that all personal loans fall under, can parents not choose to charge any interest on the loan if they want?
Click to expand...

Parents can choose to charge no interest, but Revenue would deem a notional interest rate for tax purposes. I think it's what people can get on deposit so it's low, about 2%.

So Revenue would deem that you received a gift of 2% of €400k or €8k a year.
 
Fisoon said:
2) If you suggest using two small gift exemptions of 3k each then the balance of 2k could come of the CAT threshold or alternatively I could make a 2k or more interest repayment to my parents to pay back the loan thus not effecting the CAT threshold, would that be correct?
Click to expand...

Yes, but why would you do that?
Your parents would pay Income Tax on the interest received.

Using up €2k of your CAT threshold is not a big issue.
 
Fisoon said:
4) The last point has me lost. If they give the gift of 335k the threshold has then been reached. What does it mean if they gift an asset on which they pay CGT, you would get a credit against your CAT liability on that transaction? I can't quite grasp this.
Click to expand...

You don't really need to grasp it and I was not sure whether to mention it or not. I don't see any CAT downside in getting a gift of the full threshold now. However, there could be upside to it later.

But if you really want to know.
Scenario A
1) If your parents give you a loan now - you will pay little or no CAT.
2) Let's say that in 10 years, they give you a gift of shares worth €300k on which they pay €80k CGT because even if it is a gift, they would still pay Capital Gains Tax.
3) You pay no CAT because it's below your CAT threshold.

Scenario B
1) Your parents gift you €335k now and you use up your CAT threshold
2) They later give you a gift of shares worth €300k on which they pay €80k CGT
3) You are liable to 33% CAT on the €300k - so €100k
4) But you get a tax credit for the €80k CGT which arose from the same transaction.

This credit would be wasted if you had not used up your CAT threshold.

I stress that this is a bit theoretical but the practical point is that if they give you a gift now, it is very unlikely to have any tax downsides.
 
Brendan Burgess said:
You don't really need to grasp it and I was not sure whether to mention it or not. I don't see any CAT downside in getting a gift of the full threshold now. However, there could be upside to it later.

But if you really want to know.
Scenario A
1) If your parents give you a loan now - you will pay little or no CAT.
2) Let's say that in 10 years, they give you a gift of shares worth €300k on which they pay €80k CGT because even if it is a gift, they would still pay Capital Gains Tax.
3) You pay no CAT because it's below your CAT threshold.

Scenario B
1) Your parents gift you €335k now and you use up your CAT threshold
2) They later give you a gift of shares worth €300k on which they pay €80k CGT
3) You are liable to 33% CAT on the €300k - so €100k
4) But you get a tax credit for the €80k CGT which arose from the same transaction.

This credit would be wasted if you had not used up your CAT threshold.

I stress that this is a bit theoretical but the practical point is that if they give you a gift now, it is very unlikely to have any tax downsides.
Click to expand...
Thank you. I was planning on keeping the inheritance allowance of 335k intact until my parents passed and to take a loan instead and then repay them but judging by your posts, this doesn't really make much sense.

It seems it's generally best to take the inheritance now and pay any CAT in the future.
 
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