Loan From Parent & Tax Implications

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louthman2013

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Just wondering if anyone could help me with this. I am in a marriage breakdown situation, and may need to buy my wife out of the family home. To facilitate this, my parents are considering loaning me money, in order to avoid having to remortgage on the house and loose a tracker mortgage. The existing mortgage is with Danske Bank, and they will not facilate any new business. The home is in good positive equity, even with a top up loan (thank God). I am just wondering about how should an arrangement should be formalised, and the tax implications of this. I am not clear if this potential loan would be interest free or not. It is very likely that my parents would have passed away before the loan is repaid in full.

I would assume that the loan would have to be underwritten by an agreement with a solicitor, with a clear term, repayment schedule and life assurance assigned to my parents estate in case I pre-decease them ?(highly unlikely, but possible). I would believe that if there is interest payable on this loan, this would be income to my parents, and they would need to pay income tax/ PRSI/ USC on the interest?

Any thoughts on this, and how such an arrangement should be structured. Thank you in advance
 
How much are you talking about? Given the high tax free threshold between parents/offspring it is unlikely that any tax would be chargeable on an interest free loan from your parents. In terms of whether the loan should be structured by means of an official agreement, this is entirely up to you and your parents to decide. You can also take out life assurance (if you consider this to be appropriate) and name your parents as the beneficiaries, without any official agreement being drawn up.
 
Thank you for responding. The loan would be over 100K and would push me over the 225K lifetime gift tax threshold for parent to child gifts. Hence, it is important that it is seen as a loan and not a gift. I presume any interest received by my parents would be taxable? (they are already higher rate taxpayers)
 
Yes it would be taxable if paid as interest on the facility. However, you in turn could agree to a separate gift to them of an amount unrelated directly to the loan. Given the nature of the relationship you will have some flexibility in how to structure this transaction.
 
If you are buying your wife out make sure that the agreement reflects that she has no future claim on the house. In other words that it is in full and final settlement of the house issue.
 
44brendan said:
Yes it would be taxable if paid as interest on the facility. However, you in turn could agree to a separate gift to them of an amount unrelated directly to the loan. Given the nature of the relationship you will have some flexibility in how to structure this transaction.
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I'd be interested in how you would turn interest into a tax free gift to the parents.

Are you suggesting that the parents could give an interest free loan and at the same time the child give a gift to the parents?
 
Joe_90 said:
I'd be interested in how you would turn interest into a tax free gift to the parents.

Are you suggesting that the parents could give an interest free loan and at the same time the child give a gift to the parents?
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+1

Much simpler to give an interest free loan, and the interest foregone (in excess of the 3k p.a. small gift exemption) would be a gift from parent to child and gradually eat into the threshold.
 
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