Will we be taxed on €100k loan gift from my dad?
My father has offered to give me an interest-free loan of €100,000 over five years so I can buy a house with my wife. Will either I or my wife have to pay tax on that loan if we take him up on his offer?
John, Trim, Co Meath
Eamon replies: Although it's a loan, you and your wife are getting a gift of notional interest rate in this case – as interest should technically be charged on a loan. If any tax bill arises then, it is likely to be gift tax.
Whether or not you have to pay gift tax will depend on the interest rate that would normally be charged by a bank on the loan. If the "normal" rate of interest on such loans is 4pc, then the value of the deemed gift per annum will be €4,000. This gift could then be split 50:50 between yourself and your wife. By doing so, you could take advantage of the annual small gift exemption – where you and your wife can get gifts of up to €3,000 each year tax-free. So if each of you got a gift worth €2,000 a year from your father, this gift would be within the annual small gift exemption – so no gift tax would have to be paid.
In practice, some loans between parents and their children are never actually repaid – in which case, the loan might sometimes be structured as a gift in the first place. As you can inherit up to €225,000 from your father tax-free, you as his son should be able to get a €100,000 lump sum from your father without having to pay any tax – as long as you haven't already received gifts from him which push you over the threshold.
Q I recently became self-employed – after many years of working as a PAYE employee. I am anxious to keep up some form of pension provision, however, as a self-employed individual, my earnings could be lower than that of my PAYE employment – particularly for the first few years. What's the best way to continue paying into a pension without putting myself under too much financial pressure?
Liam, Raheny, Dublin 5
A The best advice is to at least get your pension plan in place and up and running, using an independent financial adviser to provide the service. The plan you set up should be competitive when it comes to fees – and allow you to invest in products which carry as little or as much risk as you are comfortable with. The plan should offer funds from investment managers with good track records.
Your concerns about having enough money to pay into a pension are similar to those of many other self-employed people whose income may be patchy, or, as you have recently started up, growing from a low base. As a starting point, I would recommend investing an appropriate lump sum at the end of each year for the first three years to get you up and running. With a lump sum, you and your accountant will be able to work out how much should be contributed into your pension to save the most amount of tax – as well as ensuring that you have enough cash flow coming into your business.
In the long run, however, it is best to save on a monthly basis into your pension plan. Realistically, you need to work out how much money you want in retirement and work back to determine the appropriate monthly contribution. This figure might shock you, or it might give you a pleasant surprise.Again, you will need some advice, but an investment in a long-term financial plan is one that every self-employed person should strongly consider.
Eamon Dwyer is managing director of the Cork wealth advisors, City Life
Sunday Indo Business