Direct Tax Acts, Finance Act 2018

122 Preferential loan arrangements
ITA67 s195B(3) and (6); FA82 s8(1) to (5), (7) and (9); FA89 s6; FA93 s10(1); FA95 s9; FA97 s146(1) and Sch9 PtI par12(1); FA02 s8; FA03 s4; FA04 s10(1); FA05 s9; FA07 s7; FA08 s8; F(No. 2)A08 s5; FA10 s4; FA11 7(1)(c); F(No. 3)A11 s1(2) and Sch1(16)–(19); FA13 s13(j); FA17 s74

(1) (a) In this section –

[“employee”, in relation to an employer, means an individual employed by the employer in an employment –

(a) to which Chapter 3 of this Part applies, or

(b) the profits or gains of which are chargeable to tax under Case III of Schedule D,

including, in a case where the employer is a body corporate, a director (within the meaning of that Chapter) of the body corporate;]1

employer”, in relation to an individual, means –

[(i) a person of whom the individual or the [spouse or civil partner]3 of the individual is or was an employee,]2

(ii) a person of whom the individual becomes an employee subsequent to the making of a loan by the person to the individual, and while any part of the loan, or of another loan replacing it, is outstanding, or

(iii) a person connected with a person referred to in paragraph (i) or (ii);

“loan” includes any form of credit, and references to a loan include references to any other loan applied directly or indirectly towards the replacement of another loan;

preferential loan[means, in relation to an individual, a loan, in respect of which no interest is [paid]5 or interest is [paid]5 at a preferential rate, made directly or indirectly to the individual]4 or to the[spouse or civil partner]6 of the individual by a person who in relation to the individual or the[spouse or civil partner]7 is an employer, but does not include any such loan in respect of which interest is [paid]5 at a rate that is not less than the rate of interest at which the employer in the course of the employer’s trade makes equivalent loans for similar purposes at arm’s length to persons other than employees or their[spouses or civil partners]8;

preferential rate” means a rate less than the specified rate;

[“qualifying loan” has the meaning assigned to it by section 244(1)(a);]9

the specified rate”, in relation to a preferential loan, means –

[(i) in a case where the preferential loan is a qualifying loan, the rate of [4 per cent]11 per annum or such other rate (if any) prescribed by the Minister for Finance by regulations,]10

(ii) in a case where –

(I) the preferential loan is made to an employee by an employer,

(II) the making of loans for the purposes of purchasing a dwelling house for occupation by the borrower as a residence, for a stated term of years at a rate of interest which does not vary for the duration of the loan, forms part of the trade of the employer, and

(III) the rate of interest at which, in the course of the employer’s trade at the time the preferential loan is or was made, the employer makes or made loans at arm’s length to persons, other than employees, for the purposes of purchasing a dwelling house for occupation by the borrower as a residence is less than [4 per cent]12 per annum or such other rate (if any) prescribed by the Minister for Finance by regulations,

the first-mentioned rate in subparagraph (III), or

(iii) in any other case, the rate of [13.5 per cent]13 per annum or such other rate (if any) prescribed by the Minister for Finance by regulations.

(b) For the purposes of this section, a person shall be regarded as connected with another person if such person would be so regarded for the purposes of section 250.

(c) In this section, a reference to a loan being made by a person includes a reference to a person assuming the rights and liabilities of the person who originally made the loan and to a person arranging, guaranteeing or in any way facilitating a loan or the continuation of a loan already in existence.

[(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 shall, subject to subsection (4), be treated for the purposes of section 112 or a charge to tax under Case III of Schedule D, as having received in that year of assessment, as a perquisite of the office or employment with the employer who made the loan, a sum equal to the difference between the aggregate amount of interest paid in that year and the amount of interest which would have been payable in that year, if interest had been payable on the loan at the specified rate and the individual or, in the case of an individual—

(a) who is a wife or husband whose spouse is chargeable to tax for the year of assessment in accordance with the provisions of Chapter 1 of Part 44, the spouse of the individual, or

(b) who is a civil partner whose civil partner is chargeable to tax for the year of assessment in accordance with the provisions of section 1031C, the civil partner of the individual,

shall be charged to tax accordingly.]14

(3) Where an individual has a loan made to him or her directly or indirectly in any year of assessment by a person who at the time the loan is made is, or who at a time subsequent to the making of the loan becomes, an employer in relation to the individual and the loan or any interest payable on the loan is released or written off in whole or in part –

(a) the individual shall be deemed for the purposes of section 112 or, in a case where profits or gains from an employment with that person would be chargeable to tax under Case III of Schedule D, for the purposes of a charge to tax under that Case to have received in the year of assessment in which the release or writing off took place as a perquisite of an office or employment with that person a sum equal to the amount which is released or written off, and

(b)[the individual or, in the case of an individual—

(i) whose spouse is chargeable to tax for the year of assessment in accordance with section 1017, the spouse of the individual, or

(ii) whose civil partner is chargeable to tax for the year of assessment in accordance with section 1031C, that civil partner,

shall be charged to tax accordingly]15.

(4) Where for any year of assessment a sum is chargeable to tax under subsection (2) in respect of a preferential loan or loans or under subsection (3) in respect of an amount of interest written off or released, the individual to whom the loan or loans was or were made shall be deemed for the purposes of section 244 to have paid in the year of assessment an amount or additional amount of interest, as the case may be, on the loan or loans equal to such sum or the individual by whom the interest written off or released was payable shall be deemed for those purposes to have paid in the year of assessment the interest released or written off.

(5) This section shall not apply to a loan made by an employer, being an individual, and shown to have been made in the normal course of his or her domestic, family or personal relationships.

(6) Any amount chargeable to tax by virtue of this section shall not be emoluments for the purpose of section 472.

(7) Every regulation made under this section shall be laid before Dáil Éireann as soon as may be after it is made and, if a resolution annulling the regulation is passed by Dáil Éireann within the next 21 days on which Dáil Éireann has sat after the regulation is laid before it, the regulation shall be annulled accordingly, but without prejudice to the validity of anything previously done thereunder.

Go to Revenue Guidance Notes on TCA

Amendments

1,4 Substituted by FA05 s9 with effect from 1 January 2005

2 Substituted by FA04 s10(1) as respects loans made on or after 4 February 2004

3,6,7 Substituted by F(No. 3)A11 s1(2) and Sch1(16) and having effect from the passing of Finance (No. 3) Act 2011–27 July 2011

5 Substituted by FA11 s7(1)(c) and has effect as on and from 26 January 2011

8 Substituted by F(No. 3)A11 s1(2) and Sch1(17) and having effect from the passing of Finance (No. 3) Act 2011–27 July 2011

9 Inserted by FA10 s4(a) as respects the year of assessment 2010 and subsequent years of assessment

10 Substituted by FA10 s4(b) as respects the year of assessment 2010 and subsequent years of assessment

11,12,13 Substituted by FA13 s13(j) as respects the year of assessment 2013 and subsequent years of assessment

14 Substituted by FA17 s74 and coming into operation on the passing of Finance Act 2017 - 25 December 2017

15 Substituted by F(No. 3)A11 s1(2) and Sch1(19) and having effect from the passing of Finance (No. 3) Act 2011–27 July 2011

Case Law

Loan note which was exchangeable for securities did not represent a normal commercial loan. Weston v Garnett (Insp. of Taxes) – [2005] STC 1134

An alteration in the terms of an employer loan did not constitute a new loan. – West (HM Inspector of Taxes) v Crossland; West (HM Inspector of Taxes) v O’Neill. [1999] STC 147

Period of credit can constitute a loan – Grant v Watton (HMIT) [1999] STC 330

A sum transferred to a director’s loan account causing it to become overdrawn qualifies as a loan. – Euro Fire Ltd v Davison (HM Inspector of Taxes); Hill v Davison (HM Inspector of Taxes). [1997] STC 538

Revenue Guidance

Preferential Loans – eBrief No. 39/18

Revenue Precedents

Loans to employees. Preferential Rate applying. Employer wished to provide loans to employees to enable them purchase computers. The loans would be repaid by salary deduction over a 12 month period. The employer sought to have the provisions in TCA97 s122 dispensed with, by concession. Concession not acceded to. Originally published: 16/05/1997 File ref:IT 971522

Corresponding UK Tax Provision

Formerly Section 160, Income and Corporation Taxes Act 1988. Now re-enacted at various places in the Income Tax (Earnings and Pensions) Act 2003. Refer to the Destination Table of that Act for details.

Sections referred to in text

section 112 [Basis of assessment, persons chargeable and extent of charge]

section 244 [Relief for interest paid on certain home loans]

section 250 [Extension of relief under section 248 (Relief to individuals on loans applied in acquiring interest in companies) to certain individuals in relation to loans applied in acquiring interest in certain companies]

section 472 [Employee tax credit]

section 1017 [Assessment of husband in respect of income of both spouses]

section 1031C [Assessment of nominated civil partner in respect of income of both civil partners]

Chapter 1 of Part 44 [Income tax - Married, separated and divorced persons]

Cross references

122A Notional loans relating to shares, etc.

267P Treatment of credit transaction

811B Tax treatment of loans from employee benefit schemes

823 Deduction for income earned outside the State

823A Deduction for income earned in certain foreign states

825C Special assignee relief programme

897 Returns of employees’ emoluments, etc.

985A Application of section 985 to certain perquisites, etc.