Written answers

Thursday, 16 December 2021

Photo of Gerald NashGerald Nash (Louth, Labour)
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120. To ask the Minister for Finance if he will provide an update on his plans for the tax treatment of interest-free or low-interest loans in view of recent figures from an organisation (details supplied) that show a significant percentage, 42%, of first-time buyers used gifts to help fund deposits needed to secure a mortgage to purchase a home; and if he will make a statement on the matter. [62147/21]

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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Where a person is allowed the free use of property, section 40 of the Capital Acquisitions Tax Consolidation Act 2003 provides that the person has taken a gift in each year that they have that free use. The value of the gift is calculated by reference to the difference between any consideration paid by the beneficiary for the use of the property and the “best price obtainable in the open market” for the use, occupation, or enjoyment of similar property for that year. On foot of a recommendation to align the CAT code, I included a provision in Finance Bill 2021 (as initiated) to amend section 40 as it applies to the treatment of interest free (and low interest) loans.

Generally, the calculation of the best price obtainable in the open market for the use, occupation, or enjoyment of an asset is carried out by reference to the value of the gift received. For example, where a person is given the free use of a house, the gift would be valued at what it would cost to rent an equivalent property on the open market. In the case of the free use of money in the form of an interest-free or low interest loan, however, the Revenue practice to date has been to accept the current best financial institution deposit interest rate as the best price obtainable in the open market at the end of each year. As such, the value of these loans has been calculated by reference to the cost of making the gift, rather than the value of the gift received. This is out of step with the way the value of the free use of other types of property is calculated for CAT purposes.

The proposed amendment aimed to address this inconsistency by specifying that the annual value of an interest-free or low interest loan was to be calculated by reference to the best borrowing interest rate obtainable for the same sum. The intention was that a person in receipt of an interest-free or low interest loan would consult the published borrowing rates of the leading financial institutions in order to determine the best rate.

However, while this approach may be in line with the treatment for the free use of other property, it does not take account of the nuances inherent in how financial institutions determine the appropriate interest rate as lenders. Therefore, it may prove difficult to apply in practice. For this reason, I decided to withdraw the amendment at Dáil Committee Stage, to allow for further time and consideration to be given to the proposal.

In relation to the recent publication of the Banking and Payments Federation Ireland (BPFI) to which the Deputy has referred, this shows that almost 42% of first-time buyers, and almost 25% of mover purchasers, used gifts to help fund deposits needed to secure a mortgage to purchase a home. However, they said that the main source of deposits was from savings, with 96% of first-time buyers using savings to fund their deposits for mortgage loans. It is my understanding that the gifts the BPFI was referring to were in the form of outright gifts of money, rather than loans of money, i.e. there was no repayment aspect to these gifts, unlike with an interest-free or low interest loan. The Deputy should note that it has always been the case that where the taxable value of a gift exceeds the relevant Group threshold, which would include gifts of money to buyers to help fund deposits, a CAT liability will arise. I have proposed no changes to the legislation in this regard.

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