Certain high-value interest-free loans that qualify as gifts now have to be reported for tax purposes even when no tax is due to be paid.
Loans made by close relatives where no interest is charged have always been counted as benefits under the Capital Acquisitions Tax (CAT) regime. There was previously only a requirement to file a CAT return when the loan passed the tax threshold.
But as of January, anyone with any qualifying credit with an outstanding value of €335,000 or more now has to file a CAT tax return, regardless of whether they end up paying tax on it or not.
When does a loan count as a taxable benefit?
Loans become liable for CAT when a) they are provided interest-free and b) they are made between close relatives. ‘Close relatives’ in this instance include parents and children, other direct lineal ancestors and descendants (i.e. grand-parents and great-grandparents and their corresponding descendants), siblings, aunts, uncles, nieces and nephews, and certain relations by civil partnership or marriage (such as stepfather/mother, and the siblings of step-parents).
These definitions correlate to the CAT Groups, which define the thresholds on what you can receive from different relations before a gift or inheritance is liable for tax.
Loans count as taxable if they are made directly between close relatives, or by or between companies owned by close relatives.
How is tax calculated on qualifying loans?
When applied to loans, CAT liability is calculated on the potential earnings the beneficiary would receive from interest if the loaned sum was deposited in a savings account. For this purpose, the maximum interest rate currently available is used.
The taxable value is calculated on the total amount still outstanding on 31st December each year. If the full amount has been paid off during the previous 12 months, the taxable amount is reduced pro rata based on when the debt is cleared.
For example, say a person receives a loan of €750,000 from their parents. By the end of the same year, they have paid back €250,000. So the taxable value is €500,000. The highest rate of deposit interest available at the time is 3.5%. So the taxable benefit from the loan is €500,000 x 3.5%, or €17,500.
The next year, the loan is paid off in June. So that date is used to calculate the taxable value for the next year – six months, or half a year, so half of €17,500 equals €8,750.
Both of these amounts are also reduced by the Small Gift Allowance of €3,000. So the taxable value of the benefit is €14,500 in the first year, and €4,750 in the second year.
Why do I have to file even if I don’t owe any tax?
It’s important to remember that CAT isn’t automatically charged on every gift, nor on the benefit calculated from every loan for every year it is still outstanding. The value of gifts aggregates up to a certain lifetime threshold before CAT is charged.
As mentioned, these thresholds vary according to the relationship between beneficiary and disponer (or ‘giver’). You are allowed to receive up to €335,000 in gifts from your parents before they are liable for CAT. For other close relatives, the threshold is €32,500.
The higher Group A threshold is now being used as the mandatory filing threshold for submitting a CAT return for loans. As shown in the example above, the actual taxable value from even larger loans is much lower. You only pay CAT once the applicable lifetime thresholds have been crossed.
CAT returns have to be filed as soon as the value of all gifts, inheritance and benefits from loans exceeds one of the Group thresholds. Or in other words, you have to file a return when you are liable for the tax. But going forward, all loan values of €335,000 or more in a given year must be reported, regardless of whether they trigger an actual tax liability or not.
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