Capital Acquisitions Tax: Interest-free loans

It is common for children – and indeed individuals at any stage of life – to receive loans from parents or other family members. However, recent legislative changes have introduced new reporting obligations in respect of these loans, particularly when they are interest-free or provided at below-market rates.

When is a loan considered a gift?

A gift for Capital Acquisitions Tax (CAT) purposes may arise where an interest-free loan is provided. The “gift element” is considered to be the benefit the borrower receives from not having to pay interest. Revenue treats the best price obtainable in the open market as the appropriate benchmark. Typically, this is interpreted as the highest rate of return the lender could achieve by placing the funds on deposit with a bank operating in the State.

CAT thresholds

Each individual is entitled to a lifetime tax-free threshold depending on their relationship to the person making the gift. These thresholds are:

• Group A: Child (including adopted child, stepchild and certain foster children) – €400,000
• Group B: Parent, sibling, niece, nephew or grandchild – €40,000
• Group C: All other relationships – €20,000

The above limits are lifetime limit amounts. The total taxable value of benefits taken is calculated by aggregating the taxable value of:

• All previous gifts or inheritances taken within the same group threshold on, or after, 5 December 1991; and
• The current gift or inheritance.

Small Gift Exemption

In addition, an individual may receive a gift of up to €3,000 from any other individual in a year without a charge to CAT arising. This is called the Small Gift Exemption.  

Where a recipient of an interest-free loan receives no other gifts from the lender, the recipient’s Small Gift Exemption will reduce the taxable gift by €3,000. The balance, if any, will be subject to CAT at 33%, or it may reduce the recipient’s CAT Threshold, depending on the individual’s relationship to each other.

New reporting requirements from 1 January 2025

From 1 January 2025, new CAT reporting obligations arise where the following conditions are met:

An interest-free loan or a loan with a rate of interest lower than market deposit rates in place in the 12 months to 31 December; and

• The loan exceeds €335,000 on at least one day of the year in question.

A specified loan is any loan, advance or any form of credit an individual receives from a close relative.

A close relative includes a parent, lineal ancestor or descendant, sibling, uncle/aunt, sibling of a civil partner or a company in which a close relative is a beneficial owner.

Forgiveness of an interest-free loan
Where the interest-free loan is written off, a gift will arise for the full amount of the loan that the beneficiary has not repaid.

Example:
Suppose an individual receives an interest-free loan of €1 million from a parent on 1 January 2025 and no interest is paid by 30 June 2026. In that case, a deemed gift arises in respect of the interest forgone on 31 December 2025. Assuming a market deposit rate of 3 per cent, the deemed gift would be €30,000. The recipient must file a CAT return by 31 October 2026, even if no CAT is payable due to exemptions or available thresholds.

This article, by Tax Director Emma Collins, appeared in the 10 April 2025 edition of the Galway Advertiser