We own a house (not our principal residence) with our daughter, worth €600,000, which she bought 50 per cent of using her tax-free gift/inheritance from us a few years ago.
We would now like to give her a loan to buy out our 50 per cent. She is entitled to an extra €100,000 under the new inheritance tax threshold so she would need a loan of €200,000 from us to secure the title deeds of the house.
We are in the happy position of having the loan amount in a savings account in the bank, where it is currently earning a paltry 0.02 per cent interest. My questions are as follows:
Are there tax implications on our side as the lenders?
Does Revenue demand that our daughter pay interest (above 0.75 per cent) on the loan and, if so, who decides the interest rate?
Can we decide the terms of repayment of the loan, eg €1,700 per month over 10 years?
Mrs H.C.
The first thing to note here, as you concede yourself, is that you are in the very fortunate financial position to consider both early use of your daughter’s inheritance tax threshold to get her foot on the housing ladder and also to be able to fund a loan for her to buy the balance.
That, obviously, is not a position that is available to many families. However, where it is, it is a perfectly sensible approach.
There are all sorts of societal challenges presented by the inability of a generation that is now in its 30s to be able to move out of their family homes and establish their own family units, and they require significant government action, but that should not preclude doing so if you can.
As a family, you have taken the decision that your daughter’s need is now, not when you die, and that seems to make perfect sense.
But you want to make sure you get your numbers right. You say the property is valued at €600,000 and your daughter has €100,000 of wriggle room under the category A inheritance and gift tax (capital acquisitions tax) allowance before she is liable for tax.
The category A threshold governing gifts and inheritances from parents to children was increased in the last budget to €400,000, from €335,000 previously.
I’m slightly concerned about this €100,000 figure on two grounds. It suggests she has already invested €300,000 in a property now worth €600,000. But if she invested €300,000 for a half share “a few years ago”, the house should be worth substantially more now.
Property price inflation last year was 8.7 per cent nationally, and fractionally less in Dublin. From the end of 2022 to the end of 2024, the rate nationally was 13.1 per cent, rising to 21.9 per cent if you are going back three years and an impressive (for homeowners anyway) 39.2 per cent over the four years since the end of 2020.
So if the property is worth €600,000 now, it would have been worth about €431,000 at the end of 2020, €492,000 at end 2021, €530,000 in December 2022 and €552,000 at the end of 2023.
Conversely, if it was bought at €600,000 in 2020, it would be worth over €835,000 now. That 2025 market price is likely to be around €731,500 if it was bought in 2021, €678,500 is acquired in 2022 and €652,000 if it was a 2023 purchase.
That’s a lot of numbers but the bottom line is that it makes no sense if she put €300,000 into the property when it was bought that it would be worth €600,000 today. And today’s valuation is what you will need when you are figuring out what she needs to borrow from you to buy out your share and for your own tax liability.
Of course, it could be that she had already used up some of her category A allowance even before this house purchase – or that she did not use all of it when the property was acquired.
For reference, the category A allowance was €335,000 for the five years up to October last year. Before that it was €320,000 from October 2018 to October 2019, and €310,000 for the two years before that. Before October 2016, it stood at €280,000 – the point being that it was never a flat €300,000.
Getting the figures wrong on her allowance could land her with a tax bill so make sure you have that correct before working on the “borrowing” bit.
Getting to the nub of your query, you have money earning more or less zilch on deposit. You have, as you say, €200,000 available to lend her which is currently earning an interest rate of just 0.02 per cent. That means you are getting just €40 in interest each year for your €200,000 investment, which is derisory.
It’s an even worse €26.80 once you deduct Dirt at 33 per cent.
So it make perfect sense to get better use of this money – if only by giving a helping hand to a family member rather than boosting your bank’s net interest income. After all, the money on which it is paying you 0.02 per cent it will lend out to other customers at a rate of at least 3 per cent – or 150 times what the bank is paying you.
Are there tax implications for you as lenders? Only insofar as any interest you get from your daughter will be treated as income on your side and that is something to consider as you agree an interest rate. You should not be out of pocket on this deal.
But there are separate tax liabilities on you as sellers. This is not your principal private residence – your family home – so Revenue considers it an investment property, whether it was rented out or not.
You will be liable for capital gains tax on the difference between the value of the 50 per cent share at the time it was bought and the value of that half share now. The fact that you are “selling” to your daughter makes no difference.
There can also be tax issues n your daughter’s side. The key here is that, for it to be considered a loan, Revenue will want to make sure she is not paying interest at a rate “below the market”. If she is, Revenue will consider that the difference between what she is paying and the “market rate” is a gift from you to her.
And while you are allowed to gift her €3,000 a year under the small gift exemption – and your husband can do the same, anything above €6,000 will be deducted from her lifetime allowance. And if that is used up, as you plan here, she will be liable to capital acquisitions tax on it at 33 per cent.
The key here is “market rate”. The best fixed rates on the market from Irish banks currently are between 3 and 4 per cent – which would be between €6,000 and €8,000 a year in interest.
However, for the purpose of loans between closely connected people, such as family, Revenue has a long-standing practice of accepting the highest rate of return the person making the loan could obtain on investing the funds on deposit.
There was a move a few years back to peg the “acceptable” rate to the lowest borrowing rate – which would have been much higher – but it was dropped from the Finance Bill after heavy lobbying by the financial advisory sector.
But that “highest rate of return on deposit” does not mean you can charge just this 0.02 per cent rate you are currently earning. I’m not sure where your money is but AIB is currently offering 0.25 per cent on its demand deposit while Bank of Ireland is offering 0.1 per cent – either of which is substantially better (in relative terms) than what you are getting now. Even PTSB’s market-lagging rate of 0.1 per cent is five times better than what you are getting.
In this case, I suspect Revenue would expect the logical saver to be moving their cash to AIB’s market-leading demand deposit account – and therefore the acceptable interest charge for your daughter would be a minimum of 0.25 per cent, regardless of where you actually hold this money.
That means a minimum interest bill of €500 in year one for your daughter which – if you chose – could be forgiven under the small gift exemption.
Can you decide the terms of the loan repayment between you? You can but if that involves no payment of interest in any year, Revenue will likely consider the interest due to be a gift so be careful with that.
One final thing. Once she crosses 80 per cent of the relevant inheritance tax category’s tax-free limit, your daughter is obliged to file a capital acquisitions tax return even though no tax is owing at that point. With a €400,000 limit, that threshold is passed at €320,000.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
