It is a lender that has been around for decades, offering low cost (mostly free) loans to its select clientele.
Its financial strength appears to have increased in recent years, as has the demand for its services and the amount of loans.
Although it operates quietly across the country, it has regained prominence here over the past fortnight.
The government’s finance bill has focused on the “Mum and Dad Bank”, in particular the way it conducts its business and its tax treatment.
The proposed changes to the way family loans are treated as gifts for tax purposes were pushed back at the last minute, but are any changes coming and is Revenue about to focus more on how whose money is transferred within families?
What is the current tax regime for family loans?
The parent could charge interest on a loan they give to a child to top up a deposit for the purchase of a house, for example, and waive any tax liability for them or their offspring.
But this is generally not the practice and would be seen as going against the logic of giving financial assistance to a child in what is a very competitive housing market.
The tax payable is dictated by the deposit rate in effect in the market.
Indeed, it is calculated on the basis of the loss that the lender (Mom and Dad) would suffer if they did not have the money in a deposit account.
Once upon a time, a deposit would have attracted an interest rate of around, say, 2%.
Thus, if the parent granted a loan of € 100,000 with no interest rate, Revenue would consider it to be a donation of € 2,000 per year.
However, given that deposit rates have been zero – or close to – for the past several years, the giveaway was essentially offered without any tax liability.
So what was in the finance bill?
The finance bill proposed to remedy this anomaly by shifting the focus from the deposit rate to the credit rate.
In other words, it was up to the borrower to determine the benefit to him of not having to pay the going rate available in the market if he had borrowed the money from a financial institution.
This was going to involve a bit of homework and some documentary compilation on the part of the borrower.
Details had not been provided but if the rate were to be based on the lowest mortgage rate available in the market it would be around 2-3%.
Thus, for the loan of € 100,000 mentioned above, the commitment would be around € 2,000 to € 3,000.
If, however, the borrowing rate was based on a personal loan, it would be 5-7% higher, meaning that the commitment would be between $ 5,000 and $ 7,000 on the same $ 100,000.
Why was it withdrawn by the minister?
“There was no obvious benefit to the Exchequer,” said Norah Collender, professional tax manager at Chartered Accountants Ireland.
She explained this as part of the small tax exemption of € 3,000 that a person can give in a year.
“You can get a small gift of $ 3,000 from each parent that would be $ 6,000, which could cover the element of interest.”
So even if the taxable benefit were based on the loan rate rather than the deposit rate, it would still – in most cases – be below the exemption threshold for small gifts.
Mortgage broker Michael Dowling, managing director of Dowling Financial, suspects there may have been political motivation in the move as well.
“I would say it’s like interfering with the capital gains tax on the sale of a family home. If the same people are seen to be hit all the time by various tax raising measures, that would be considered a step too far, ”he explained. .
“And besides, all that would happen is the parents would end up paying.”
Surely there is an argument for societal equity?
And this is the crux of the matter.
There is a cohort that can afford a parent loan and then there are those who cannot.
There is a well-documented housing shortage, and those who can afford to supplement their supply for a property with parental money (while those who don’t are limited by loan limits) are sure to get the keys to the house or apartment at the end of the day.
And in an age when pips attract no gain from banks – and can even be in line for a charge in the form of negative interest rates if they’re big enough – there’s a built-in incentive for it. parents to give money to children.
Should this contribute to house price inflation?
“There is no doubt that this has an impact on the prices,” said Michael Dowling.
“If you have 3 or 4 people bidding on the same house for € 400,000 or € 500,000, and you can take € 50,000 out of the hat to make a difference, that will have an impact on the prices. once another house in that area comes up for sale, the benchmark will be set at the price of the first house, “he added.
And the loans keep getting bigger.
“I’m 30 years old in the business and in the last few years $ 10,000 to $ 30,000 was the level you would have seen. Now $ 50,000 to $ 60,000 is pretty common and $ 100,000 wouldn’t surprise me.” Mr. Dowling said.
He cited a few examples of buyers essentially getting an advance on their inheritance with a donation, as opposed to a loan, up to the current maximum lifetime threshold of € 335,000.
Figures are not available on the total amount loaned to the children in the family, but Michael Dowling estimates it could reach € 1 billion per year.
Is this the end of the road for this problem now?
The inclusion of the measure in the budget bill without being reported in the budget last month surprised more than one.
No reason was given by the Minister of Finance for reconsidering the plan other than that it required further consideration.
“The Minister has decided not to act on Article 62 of the bill relating to the tax treatment of interest-free or low-interest loans, as he believes that greater consideration should be given to the proposal. The ministry said in a statement in which the minister welcomed a number of government amendments to the finance bill, which may suggest that at least some resistance has been manifested at the political level.
As to whether it will be part of next year’s budget or the finance bill, after “more thought”, it could well do.
One approach that would not require any legislative change is for the Department of Finance to ensure that these loans are repaid and are not effectively gifts from parents to children.
“Income may seek proof that a loan is paid off and is not a cash gift,” explained Norah Collender.
“They have the power to question any transaction with tax implications. For example, with all of the CAT’s exemptions for trade and agricultural relief, incomes have tightened in recent years,” she added.
This way, they benefit from greater oversight of transactions and task both parties who donate or inherit to prove that they are compliant.
A similar approach could be applied to the use of family loans to ensure that they constitute such a transaction and that they are repaid or, failing this, that they are declared as donations that can be charged against the loan. life inheritance / tax exemption threshold for cash donations which is currently set at € 335,000.
It’s fair to assume that we haven’t heard that last question yet.