I am informed by the Revenue Commissioners that where a parent makes a loan interest free (whether described as a gift or not) to a child on the basis that the full loan will be repaid but without interest, there are no tax implications for the parent. The child is considered to be in receipt of an annual gift from the parent throughout the term of the loan. The value to the child of this gift is an amount equivalent to the income from the investment of an amount equal to the amount of the loan. In practice, this is taken to be the amount that would be earned if the amount of the loan was invested at the best bank deposit rate obtainable in the open market on such a sum.
If this annual value of the free use of a sum of cash (in effect the interest that would have been obtained had the money been placed on deposit) is below €3,000 per annum, the gift each year is exempt from CAT under section 69 CATCA 2003-small gifts exemption- provided the donee has received no other gifts in that year from the same donor.
If the annual value of the free use of cash exceeds €3,000 per annum then only the excess each year is treated as a taxable gift. However, it is important to note that no CAT becomes payable on any such gift until the total value of all taxable gifts and inheritances taken by the child from the parent exceeds €225,000.
To take an example, if the best bank deposit rate obtainable on a sum of €40,000 was, say, 2%, the donee would be deemed to take a gift each year of €800. That deemed annual gift of €800 is below the annual small gift exemption of €3,000 and is therefore completely outside the scope of CAT, assuming the donee has taken no other gifts in that year from the same donor.
If a parent makes a gift of €40,000 to a child then €37,000, being the amount in excess of the small gift exemption, is a taxable gift. However, as already indicated no CAT becomes payable on any such gift until the total value of all taxable gifts and inheritances taken by the child from the parent exceeds €225,000.
The Deputy's reference to a sum being "officially" gifted to a child is not understood. If there is some doubt about the true nature of a transaction, the Revenue Commissioners will have regard to all the relevant facts and circumstances in deciding the correct tax treatment of the transaction.
