Lending to family can be a tricky business

I get a loan (which I have to pay him back whenever I can) from my brother who lives in the United States. It is towards my new home, for which I am missing € 55,000 after my mortgage.

He would send me this money in small amounts of $ 2,000 to $ 3,000 by wire transfer. But after reaching an amount of € 30,000, it stopped, indicating a reason for limit reached.

It was then that I searched the internet and came across your and other articles on Capital Gains Tax and Interest Free Loan Tax. I was under the impression that there is no tax on donations or interest-free loans from siblings or parents.

I am not Irish and have lived in Ireland for four years and do not know much about Irish taxation.

And after reading all the articles, I’m really worried that I will have to pay a hefty tax on the loan I get from my brother. I read your article in The Irish Times but it was three years old: is your article still relevant to me and today?

Mr. Vice-President, e-mail

In the real world, families lend and borrow regularly. It is in the nature of families to help each other. These are transactions based on trust and not on the assessment of business risks. No one is looking to profit from exercise, just make sure they’re out of their pocket – unless, of course, they consider it a giveaway.

I guess in almost all cases it never even occurs to people that they might mess with the tax commissioners. But there are rules for giving money to family members. And the impact is obviously different, depending on whether it is a loan or a donation.

But just to say, from the outset, that you are wrong in saying that there is no tax on gifts or interest-free loans from relatives.

First off, I should address the one issue that gives me a bit of difficulty – suddenly stopping regular payments sent to you by your brother to increase your mortgage.

I am a little confused. You state that after the transfer of € 30,000 the money stopped coming with a message stating that a limit had been reached. Was this a message you received or was it sent to your brother in the United States by his bank?

My initial thought was that regular and sizable transfers could have lifted the veil on EU money laundering legislation. But, if that were the case, I would expect the US or EU authorities – or both – to have sought reassurance from you and your brother about the validity of the transfers and this did not happen. from what you say.

My best guess is that your brother inadvertently hit a limit imposed in the US banking system, and the problem is not the total amount he sent you but the number of separate transactions.

There is something in the American system called Regulation D. This is a set of rules established by the Federal Reserve to ensure that banks have enough liquidity to meet the needs of customers, that is, say to make sure there is no rush on the bank.

Regulation D appears, more formally, to fall under Title 12, Chapter II, Subchapter A, Part 204 of the United States Code of Federal Regulations. These are the structure of the rules regarding banking and banking in the United States.

The practical impact of this on your brother is that there seems to be a limit to the number of wire transfers from certain types of accounts during certain time periods – a statement cycle or a month. If you go over that limit, you may be charged a fee or the transfers may simply stop, from what I understand – and I’m certainly no expert on the Federal Reserve’s more obscure retail banking rules.

It seems to me that your brother needs to clarify the situation with his lender and then adjust the timing or size of any transfer to make sure it is within the rules.

Tax implications

Back to the more mundane questions – the tax implications of such borrowing.

If it’s a giveaway, that’s pretty straightforward from your point of view. As an Irish taxpayer – which you certainly are after four years here – you are limited to receiving gifts or inheritances from a close relative (a brother / sister, aunt / uncle or a grandparent) of € 32,500.

Anything over, you will be taxed at 33 percent. So on $ 50,000 – assuming you didn’t receive any gifts or inheritances from someone else in that category – you would face a tax bill of $ 5,775.

Now, if it is a loan, the tax liability works differently. Again, there are rules on what constitutes and does not constitute a loan.

In principle, if there is no interest charged, most tax authorities will treat the payment as a gift and taxed as above. Even if there is a written loan agreement, the Irish authorities will regard the unpaid interest as a financial gift in itself.

So how much interest should you charge? I used to think it was the market rate, but I understand from Revenue that the problem (for you) is how much your brother could have gotten out of that same money on deposit in Ireland. This is an amount they have to charge as part of a family loan.

Right now, even with 10-year cash, the best deposit you could get would be 1.5% p.a. – that’s around $ 750 p.a.

Either you can pay your brother this money, or he can “gift” you this amount every year. In Irish terms, this would fall under the exemption for small gifts of up to € 3,000 per year, which would mean you don’t have to pay interest or tax. I don’t know what implications this might have for your brother in the United States, although I think he would have no tax problem on any donation under $ 15,000.

Brother in the United States

For what it’s worth, there are ways your brother can make it more tax-efficient for him, especially if you find yourself unable to repay.

Apparently, as a loan loss, it can be written off as a capital loss, which he could use to offset capital gains. However, with written proof that it is a loan, the United States Inland Revenue Service could well assume that it is simply a gift and no loss would be tax deductible. .

For what it’s worth, he’ll also have to charge what’s known as the applicable federal interest rate on the loan if he doesn’t want potentially unwanted tax side effects at its end.

Another good reason to write these things down on paper. It protects everyone and ensures that there is no confusion – everyone is clear from the start on the purpose of the transaction.

Ultimately, the good news for you is that while there are tax rules, then it seems unlikely that you will ever have to pay actual interest or face a tax bill. And, if I’m right, there shouldn’t be a problem restarting payments from the US.

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