I'm planning on lending my son money for his first home - can I offset the annual gift exemption of €3000 against a parental loan?
Question: I am planning to lend my son some money so that it is easier for him to buy his first property.
Can the annual gift exemption of €3,000 from parent to child be offset against a parental loan over a number of years until the loan is repaid? And can this be done without actually transferring funds back and forth - but as a written agreement?
Sean, Clontarf, Dublin 3
Answer: There are two potential ways to reduce chargeability to Capital Acquisitions Tax (CAT) when it comes to gifts from parents to their children. The most commonly talked about relief is the CAT group threshold - the lifetime tax-free threshold that can be applied in calculating the taxable value of any gift or inheritance between persons within the same group. The current group threshold that applies to a gift or inheritance from a parent to a child is €310,000. So, if a child has never received a gift or inheritance from a parent, he may avail of the full lifetime tax-free threshold and may not have to pay any CAT on the amount received.
The second way to reduce chargeability to CAT is the €3,000 annual gift exemption you mention. This exemption is not specifically in respect of gifts to one's children but applies to gifts generally - that is, the relationship between the parties is not relevant. Providing some money to your son to help him acquire his own property can be structured as a loan. If you wish, it can be structured as an interest-free loan with repayments to be made whenever the child's circumstances permits. However, from a tax perspective, the rate of return that the parent would have received if funds were invested on deposit will be considered as a taxable gift made to the child. For example, if the loan is for the amount of €100,000 and it is established that the parent would receive an interest rate of 1pc for these funds if held on deposit, then the deemed annual taxable gift will be €1,000. Under the small gift exemption of €3,000, an annual gift of €1,000 would not attract a CAT bill.
As a taxable gift value of up to €3,000 per disponer (one who legally transfers his or her own property to another) is allowed, this means that if the loan documentation was drawn up to show that the loan is from both parents, the child can avail of a combined annual gift exemption of €6,000 in respect of this loan. If the taxable value of the loan when calculated exceeds €6,000 per annum, the lifetime tax-free threshold can be availed of to provide further tax relief.
As long as no repayments are made, the loan amount will not decrease each year and an annual review would be required to ensure that the taxable value is not more than the small gift exemption. If the loan is forgiven or written off, the amount written off becomes a taxable benefit, which can be relieved by the lifetime tax-free threshold.
Question: A group of us bought a property in Spain in 2000. It is a modest property and we purchased it using our savings and bank loans. We were required to open a Spanish bank account at the time in order to pay all administrative costs associated with the property, including local taxes and so on.
Since then, we have shared the use and costs of the property. We have never rented it. Equally, the bank account is a current account on which we have never earned any interest. The most we would have had in the account at any one time would have been about €500. Our problem is that we never declared the property or the bank account to the Revenue Commissioners as we didn't think we were required to do so.
We note that Finance Minister Michael Noonan pledged in the Budget to make it a criminal offence for individuals who fail to declare accounts or other assets held in tax havens. We do not believe we have any tax liability as we did not earn any income from the property or the bank account. Would Spain be regarded as a tax haven? Must we declare this property and bank account to Revenue?
Teresa, Sligo town
Answer: Regardless of the fact that you are not in receipt of any income from the Spanish property, you still had an obligation to report the opening of the Spanish bank account to the Irish Revenue Commissioners in the year in which the account was opened. Revenue deems each resident individual who opens a foreign bank account to be a 'chargeable person' for that particular tax year. A chargeable person is required to file the annual Form 11 tax return, in which, among other things, he should declare the name and address of the financial institution where the account is located, the date on which the bank account was opened, any amount lodged into the account when opened, and details of any intermediaries in Ireland who assisted in opening the account. A tax return should be delivered by October 31 in the year following the tax year in question.
While it is unlikely that you would fall within the category of taxpayers who were mentioned in the minister's speech for Budget 2017 in respect of tax havens, you may wish to obtain the Form 11 for 2000/2001 (available online) and file this return now to fulfil your obligations. While there is potential for some exposure to late filing penalties, surcharges or interest, these may not apply, depending on the circumstances - provided there was no outstanding tax liability due. You should also seek Spanish tax advice on whether there are any reporting obligations in respect of the property and the bank account.
Question: My father recently died and his pension does not transfer to his wife (my mother), which leaves her with only the State pension to get by on. I would like to supplement her retirement income a little. Is there a tax-efficient way of doing this?
Sean, Naas, Co Kildare
One way to support your mother financially would be by way of a gift of up to €3,000 per year. Every individual is entitled to receive a small gift exemption of up to €3,000 where they will not be subject to Capital Acquisitions Tax (CAT) at 33pc. This option, however, is not tax efficient for you as the gift that you are providing your mother would be coming out of income that you have already paid tax on - so there would be no tax relief for you.
Another option would be to set up a deed of covenant. A deed of covenant is a legally-binding agreement made between two people where one party agrees to pay an amount to the other party without receiving any benefit in return. It must be properly drawn up and witnessed. Not all covenants are tax efficient and, where covenanted amounts are paid to adults, they will only be tax efficient where the adult is either permanently incapacitated or aged over 65.
Where the adult is incapacitated, there is no limit to the covenanted amount that can be utilised for tax purposes. However, if the adult is not incapacitated but over 65, there is a limitation whereby the tax relief available cannot exceed 5pc of the covenantor's total income. You will be required to deduct tax at the standard rate from the gross payment to your mother but, if her total income is less than the exemption limits (currently €18,000), she will be able to claim this tax back.
To avail of tax relief, the deed must be entered into for a period of more than six years. No tax benefit will be available for you if you are only paying tax at the 20pc rate.
Email your questions to firstname.lastname@example.org or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.
While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.
Christine Keily is tax director with Taxback.com
Sunday Indo Business