John McColgan and Shona Chambers
Last year, the Central Bank recently finalised its new mortgage lending rules, with some changes from what was originally rumoured.
First-time buyers can continue to put down a 10% deposit, provided that the purchase price is less than €220,000 and they don’t borrow more than 3.5 times their joint income. But homeowners who want to trade up will now need 20% of the purchase price of their new home.
by Shona Chambers
With mortgage lending in the news, some clients have asked me about parents helping a child with part of the purchase price of a house. How would Revenue treat this for tax purposes?
In recent weeks, I have discussed Inheritance Tax also knows as Capital Acquisitions Tax. These rules also extend to gifts that parents may give to their children. The thresholds allow parents to transfer assets worth €225,000 to a child tax-free, either as a gift or an inheritance. Anything above that lifetime limit is taxed at the current Capital Gift Tax rate of 33%.
In the past, when it came to helping children with a house purchase, some parents availed of a loophole that stated that money paid by a parent for “support, maintenance or education” of a child would not be counted against the lifetime tax-free threshold. However, Revenue has recently been clamping down on the definition of “support,” especially it comes to assistance such as helping adult children to buy houses. It has now limited parental support to minors under 18, or children in full-time education up to the age of 25.
The gift tax rules do not apply to loans, though. It is still possible for a parent to lend a child money, and provided that the child intends to repay the loan, it would not be classified as a gift for tax purposes. However, if you give your child an interest-free loan, what is called the ‘notional interest’ (roughly equivalent to what a bank would charge on the same loan) will still be regarded as a gift.
This is where the annual small-gift exemption of €3,000 a year comes in. You are entitled to give anyone €3,000 a year tax-free, and so there would be no tax liability if the notional interest fell within that limit. For example, you could you lend a child €75,000 at a notional interest rate of 4% and it would not trigger a liability. If your child is buying a house with a spouse or partner, you could lend money to both of them, potentially extending the combined small-gift exemption to €6,000 worth of notional interest annually.
Naturally, I recommend talking to a financial advisor or tax advisor if you are in the position of wishing to help a child with a house purchase. You do not want to do a good deed only to find that it triggers an unexpected tax bill down the line!
Shona Chambers BA QFA RPA is a Qualified Financial Advisor with John McColgan Financial Services Ltd.
You can contact Shona by telephone or email on 074) 9124366/shona@mccolganfinancial.ie
