Revenue Note for Guidance
A charge to tax in respect of preferential loans arises where loans are made to employees at a rate which is either nil or at a rate lower than normal commercial rates. The charge to tax is on the difference between the amount of interest paid on the preferential loan and the amount of interest which would be payable if the loan had been subject to an interest rate of 4 per cent in the case of loans qualifying for mortgage interest relief under section 244 or 13.5 per cent in all other cases. The charge arises for each year, or part of a year, for which the preferential loan is outstanding. The amount charged is treated as if it were interest actually paid by the employee and is eligible for relief subject to the normal restrictions on the eligibility of interest.
(1)(a) “employee” is an individual employed by an employer in an employment which is assessable to tax under Schedule E or Case III of Schedule D. Where the employer is a company, a director of the company is also treated as an employee.
“employer”, in relation to an individual includes—
“loan” includes any form of credit or a loan which, directly or indirectly, replaces a loan (this ensures that a preferential loan is caught by the section irrespective of the guise in which it is made).
“preferential loan”, in relation to an individual, is a loan on which either no interest is paid or interest is paid at a preferential rate. The loan may be made, directly or indirectly, either to the individual or to his/her spouse, by the individual’s employer. Loans which are made by an employer to an employee at normal commercial interest rates are not preferential loans.
“preferential rate” means an interest rate which is less than the specified rate.
“qualifying loan” has the meaning assigned to it by section 244(1)(a).
The “specified rate” can be one of 3 different rates depending on the circumstances-
(1)(b) A person is connected with another person if the persons would be regarded as connected for the purposes of section 250. The meaning of “connected” in section 250 as used in subsection (5)(b) of that section treats as connected persons a lender who lends money otherwise than in the ordinary course of business and the person to whom the money is lent.
(1)(c) So as to ensure that indirect methods of giving a preferential loan do not result in such a loan escaping the provisions of the section, a reference to a loan being made is broadened to include —
(2) Where, for the whole or part of a year of assessment, there is outstanding in relation to an individual a preferential loan, the individual is regarded for the purposes of section 112 or a charge to tax under Case III of Schedule D, as having received in that year a perquisite of his/her office or employment with the employer who made the loan. The amount of the perquisite to be so charged is the difference between the aggregate interest paid in that year and the interest which would have been payable if interest had been payable on the loan or loans at the specified rate.
(3) Where the individual’s income is assessed on his/her spouse in accordance with section 1017, the charge to tax is made on the spouse.
Where the individual’s income is assessed on his/her civil partner in accordance with section 1031C, the charge to tax is made on the civil partner.
Special rules apply where a loan is made, directly or indirectly, by an employer to an employee or by an employer to a person who subsequently becomes an employee at a rate superficially in excess of the specified rate but in practice at a lower rate or a nil rate due to the loan or any interest on the loan being entirely or partially released or written-off. In such a case the employee is charged on the amount of the loan or interest that is so written-off or released. For example, a loan could be given, for say, a 20-year period at a rate of 18 per cent. The employer could then write-off all or part of the loan or, alternatively, release the employee from payment of further interest as a compensation for paying the interest in full over the first 5 years. Where this happens, the employee is charged to tax in the year of the release or writing-off in respect of the amount released or written-off. The amount so released or written-off is treated as a perquisite of the office or employment and assessed accordingly.
(4) An amount of interest charged to tax in accordance with subsection (2) or (3) may be allowed as a deduction from income under section 244. For any year of assessment in which any such amount is assessed on an individual, he/she is treated as having actually paid an equivalent amount of interest and, accordingly, the individual is entitled under section 244 to obtain relief from tax to the extent that any such amount would be eligible for relief under that section. Relief under that section is available for certain interest paid on money borrowed to construct, purchase, repair or improve the sole or main residence of the borrower, the former or separated spouse of the borrower or a dependent relative of the borrower.
(5) Excluded from the application of the section are loans made by an individual employer in the normal course of his/her domestic, family or personal relationships.
(6) Amounts brought into the charge to tax by this section are not regarded as emoluments for the purposes of the employee tax credit under section 472. This provision is necessary to avoid claims where, for example, the non-working spouse of the employee is the individual to whom the working spouse’s employer actually makes the loan. Although the working spouse may be the one on whom the charge under the section is made, there might be a possibility, but for this provision, that the non-working spouse could claim that as he/she was being treated as having received an emolument he/she was entitled to the employee tax credit provided for by section 472.
(7) The Minister for Finance may by regulations prescribe the specified rate. In any such case the usual provisions for the presentation of regulations to Dáil Éireann apply.
Relevant Date: Finance Act 2020