We follow a very good column in the Irish Times which today dealt with the tax issues of loans by parents to children. The article can be viewed here.
The article deals - broadly - with the gift and potential inheritance tax implications of loans between parents and children. In short, the advancement of a loan at less than market rates (which is usually the case in these situations) has gift/inheritance tax implications for the child. This arises under "free use" rules.
The column is a good source of general information on personal finance matters, but there are some important points that we would add to this topic:-
It is not correct that interest needs to be charged on a loan by a parent to a child. Revenue cannot determine or stipulate that interest is actually charged on a loan between family members or others.
Actually charging interest would create an income tax exposure for the parent(s) concerned.
The rate of interest (which does not have to be charged) but may be imputed for gift tax purposes would not be that referable to normal bank lending rates unless the mortgage is secured and provided on market terms (i.e. monthly repayments and fixed term).
Unless advanced on the above basis the rate of interest for gift tax purposes would most likely be higher rate on account of there being a higher risk of recovery.
The annual gift allowance can be doubled by having a joint loan or quadrupled if the child is married. This potentially goes a long way to enabling the loan to be carried or unwound without any negative tax implications.
Finally, there is provision (albeit recently restricted) for the tax-free transfer of an interest in a dwelling house by way of gift and inheritance.
Whilst not directly relevant, we would also highlight that leaving loans outstanding can cause significant problems in future and cause inter-family issues when administering a parent's estate.
With planning, steps can be taken to avoid or mitigate the negative tax issues associated with loans.