New gift tax rules to impact the Bank of Mum and Dad
Under the new rules, set to come into effect later this year, the child will instead be assessed as having received a benefit equal to the amount of interest they otherwise would have had to pay to borrow an equivalent amount of interest.
The change will herald a key change that affects parents stepping in to assist their children under what has become known as the “Bank of Mum and Dad”.
Leo Varadkar famously remarked that “many of us” availed of help from our parents in seeking to accumulate a deposit for buying a house, resulting in a backlash against his perceived privileged position.Â
The new rule is changing the basis on how the free use of money is to be taxed. Under current rules, a parent lending their child money is deemed to confer on that child a benefit equal to the amount of interest they could otherwise have earned. Bank interest has been on the floor for many years now, and as a result, the existing tax provisions had virtually no effect in taxing the free use of money by children.
For example, a parent wishes to help out their daughter and lends her €200,000 to enable her to buy an apartment. The child intends on repaying her parents €20,000 per year over the next 10 years. This strategy might be repeated over time where as soon as one child is set up, they, in turn, assist the next, recycling savings between children while all the time retaining the capacity to fund themselves into retirement.
The child benefits from not having the burden of interest applied to their borrowings, meaning they can own their property outright quicker than if they had acquired a mortgage. The child also benefits from less legal fee absent of the application and subsequent removal of a mortgage charged against their property. Meanwhile, the parents are content they have significantly assisted their child.
Because savings deposit rates are so minuscule, the benefit conferred on a child under the above plan calculated by reference to the amount of deposit interest that could hypothetically be earned is minimal and would in any event fall below the annual €3,000 tax-free allowance, meaning the child’s lifetime limit of €335,000 remains intact for future gifts or inheritances.
Under the new rules, set to come into effect later this year, the child will instead be assessed as having received a benefit equal to the amount of interest they otherwise would have had to pay to borrow an equivalent amount of interest. Say lending rates are at 3%, this would mean in year one the child is deemed to receive a benefit equal to €9,000 being the amount of interest they otherwise would have had to pay to borrow money and consequently the lifetime threshold between parent and child becomes eroded over time.
It’s also disheartening when you consider that policy shift will steer children toward arranging loans from credit institutions, thereby lining the pockets of banks rather than having a system of intergeneration assistance. Given the goalposts are changing, planning when and how to transfer wealth from one generation to the next should be done at the earliest opportunity.
Consideration should be given at an early stage of making full use of the annual threshold of annual tax-free amount, whereby each parent could potentially give each child €3,000 per annum, (a combined total of €6,000 from the two parents being €3,000 from each).
As the saying goes, I’ve yet to meet a hearse with a towbar, balancing succession brings together tax planning with a view to minimising the tax costs, ensuring sufficient security for parents, while conferring meaningful benefits on successors, and navigating potential pitfalls such as the fair deal scheme. Each individual should obtain professional tax advice specific to their own circumstances.
- Kieran Coughlan is a chartered certified accountant and chartered tax adviser.
