We have been giving our children between €3,000 and €6,000 a year each over the last few years and they each now have a comfortable amount of money saved, which they don’t need at this present time.
We find ourselves unexpectedly in the position of needing a lump sum, which we could borrow from the bank and are in a position to pay back over time, or alternately will get a lump sum when we retire in the next three to four years.
I wonder would it be possible to borrow this money from our children and pay it back to them in the next couple of years without impacting on the tax-free nature of the money we have gifted them?
Ms S.B.
Intra-family loans are a very common feature these days. They’re cheaper than anything you will borrow elsewhere and there are fewer pesky questions from lenders required by regulators to make sure you’re good for the debt.
But, as you’re clearly aware, it is more commonly the Bank of Mum and Dad providing finance to their children or other relatives rather than the other way around.
That doesn’t mean it cannot be done, not at all. And, as long as all transactions are transparent, you should have no issues with Revenue at all.
You say you have been giving your children between €3,000 and €6,000 a year for a number of years. This will be through the small gift exemption, one of the more generous tax reliefs available out there.
Any individual can gift anyone else up to €3,000 a year with neither party having to worry about tax. It is most commonly used within families to give gifts to children or grandchildren.
The one main stricture is that the money must be for the use of the recipient, not for passing on to a third party. So, for instance, grandparents could not gift their grandchildren with the understanding that the money is to be passed to the parents.
That is why it is also good to keep a record of the gifting. The easiest way to do this is by sending it through to the child’s bank in your case.
But that’s not what we are talking about here. There is no gaming of the relief as long as this is clearly a loan and not a muddying of the waters on family finances.
The children now have funds and you have an unexpected financial need. As you say, you could go to the bank but, in the same way as children approach the Bank of Mum and Dad, there is no reason why you cannot take a loan from your children.
It certainly helps that the children appear to be of an age where they are adults or can at least control their bank accounts, though you don’t say whether they still live in the family home. I don’t see any reason why the arrangement you outline would not be possible even with younger children but the transparency that makes the whole thing less likely to be subject to query is easier if they can speak their own mind.
The other thing to remember is that, as a loan, the transaction needs to carry an interest rate equal at least to what the children can get on a demand deposit account. Clearly, this is not very demanding right now but it is important that provision for interest is in place. Otherwise it is not a loan at all, but a gift with the very different implications that can have.
There’s nothing stopping you paying the children a higher rate of interest. That’s a choice for you but it must at least match demand deposit account rates.
Finally, please make sure everything is set down in writing – the amount borrowed, on what terms and for how long (whether fixed or otherwise) – before any money is transferred from the children to you. Ideally, this should be signed by both parties so that if there is any Revenue query, it can be addressed without stress or confusion.
Ensuring that any transfers are done by bank transaction – both the “drawing down” of this loan and any repayments – also makes it easier to stand over the transaction in the event of any subsequent query rather than simply making cash-in-hand payments.
There is nothing to stop you borrowing from your children but, as you can see, the important thing is to make sure the whole thing is transparent and above board rather than simply relying on informal verbal agreements.
Revenue might never get involved – the chances are very strongly that it won’t – but if it did, it’s good to be able to have paperwork and a money trail to make your case. This is especially so if the circumstances could be characterised as a relationship of unequal balance – for instance where the child or children are still dependent on the parent for accommodation in the family home.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email todominic.coyle@irishtimes.com, with a contact phone number. This column is a reader service and is not intended to replace professional advice
