Written Answers. - Preferential Loans.
Enda Kenny
Question:
179
Mr. Kenny
asked the
Minister for Finance
the method of assessment of benefit in kind for staff of banks and financial institutions who avail of low interest loans; and if he will furnish examples of how this applies in practice.
[2388/00]
Section 122 of the Taxes Consolidation Act, 1997, provides for the taxation of benefit in kind on preferential loans made to employees by an employer.
Where an employer provides a loan to an employee at a rate of interest which is lower than the specified rate, referred to as a preferential loan, the difference between the interest paid, if any, and the interest payable at the specified rate is treated as a benefit-in-kind for tax purposes. The specified rate is set from time to time by the Minister for Finance to keep it in line with changes in market interest rates.
Specified Rate – General
Depending on the use to which the loan is put the specified rate is:
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Principal PrivateResidence
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Other Loans
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6% from 6 April 1999 (previously 7%)
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10% from 6 April 1999 (previously 11%)
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[Due to fall to 4% from 6 April 2000]
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[Will remain at 10% from 6 April 2000]
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Specified Rate for bank/financial institution employees in respect of Principal Private Residence Loans.
Where a bank-financial institution, whose trade partly consists of making principal private residence loans for a fixed number of years at a fixed rate of interest, gives a loan to an employee of the bank-financial institution to purchase a principal private residence at a fixed rate of interest for the full duration of the loan, and the rate charged to non-employees on such a loan is less than the specified rate of 6%, then the specified rate for the purposes of calculating benefit-in-kind, is the rate charged to non-employees.
For all other principal private residence loans, the specified rate is 6%.
Example 1: Principal Private Residence Loan
Bank X gives an employee a loan of £40,000 at a fixed rate of interest of 3% over 20 years. The loan is used to purchase a dwelling house which will be the employee's principal private residence. The individual is single, and is a first time buyer.
At the time the preferential loan was given to the employee, it is not general practice for the bank to make principal private residence loans to non-employees at a fixed rate of interest for the full duration of a loan.
The specified rate in this case is 6%. The benefit in kind charge is as follows:
Interest payable at 6%: £40,000 X 6% = £2,400
Less interest actually paid: £40,000 X 3% = £1.200
Benefit in kind Charge £1,200, (chargeable at the employee's marginal rate of tax)
Income tax relief will be due on the mortgage interest payable at the specified rate. £40,000 x 6% = £2,400
This relief is available at the current standard rate of tax (24%).
Example 2: Principal Private Residence Loan
As above, except that at the time the preferential loan was given to the employee, it is general practice for the bank to make principal private residence loans to non-employees at a fixed rate of interest for the duration of a loan, and the rate of interest charged on such loans is 5%. (It should be noted that this rarely arises in practice).
The specified rate is 5%, and the benefit in kind charge is as follows:
Interest payable at 5%: £40,000 X 5% = £2,000.
Less interest actually paid: £40,000 X 3% = £1,200
Benefit in kind Charge £800, chargeable at the employee's marginal rate of tax
Income tax relief will be due on the mortgage interest payable at the specified rate. £40,000 x 5% = £2,000
This relief is available at the current standard rate of tax 24%.
Example 3: Other Loans
Bank X gives an employee a loan of £10,000 at a rate of interest of 4%. The loan is used to purchase a car.
The specified rate in this case is 10%. The benefit in kind charge is as follows:
Interest payable at specified rate 10%: £10,000 X 10% = £1,000
Less interest actually paid: £10,000 X 3% = £300
Taxable benefit in kind £700 (chargeable at the employee's marginal rate of tax).
There is no income tax relief due in respect of the interest paid, as it is not a qualifying loan that is, principle private residence loan or a loan used to acquire an interest in a private company.
