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Parent bailouts to trigger CAT mortgage bill

If you have guaranteed your son or daughter’s mortgage and they default on their repayments, they may become liable for CAT (Capital Acquisitions Tax) if you pay their loan to the bank.  This is according to an article by David Clerkin in The Sunday Business Post.

Defaulting mortgage borrowers will face substantial tax liabilities if their banks invoke parental guarantees to get their money back or minimise losses.

Revenue has confirmed that parents or other third parties that have guaranteed a borrower’s loans will be deemed to have given them a gift and triggered a corresponding liability to capital acquisitions tax (CAT).

CAT is applied at a rate of 25 per cent of the value of the gift or donation. Tax rules dictate that a borrower would face a CAT liability of €25,000, for example, if his or her parent is pursued by a bank on foot of a guarantee of €100,000.

In such a case, the invoking of the parental guarantee would result in the parent paying €100,000 to the bank to cover a son or daughter’s debt.

This payment would be treated for tax purposes in the same way as the parent giving a gift of €100,000 to his or her child. This tax liability could be deferred, however, depending on individual circumstances.

Current CAT rules allow for children to receive gifts or inheritances of up to €414,000 from their parents during their lifetime.

The government has substantially reduced this ceiling in recent years, however – it stood at €542,000 two years ago. It has also increased the CAT rate from the old 20 per cent rate over the past two years in response to the exchequer’s funding problems.

As the ceiling relates to cumulative gifts or inheritances, any parental guarantees invoked by a bank would reduce the amount that a child could inherit tax-free in the future.

The tax bill would fall due immediately, however, in cases where the borrower had already used up his or her tax free gift threshold.

The Sunday Business Post recently reported that a number of the country’s banks were preparing to pursue parents who had provided guarantees in respect of their children’s mortgages.

The guarantees are most likely to be pursued in cases where borrowers are no longer capable of repaying their loan and the bank would not recover the outstanding balance in full from the sale of the underlying property.

Read the Full Article here.

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