Taxation of debt forgiveness – is it a liability in waiting?

The writing-off of a debt, for example, by a bank, is not a disposal for Capital Gains Tax purposes. We have already queried this with Revenue and their direction on it is established.  There is also no provision in the Taxes Consolidation Act 1997 specifically providing that the writing-off of a debt is a gain.

However, the taxation of gifts is dealt with in the Capital Acquisitions Tax Consolidation Act 2003.

The position as regards Capital Acquisitions Tax is that it is assumed that financial institutions, in making an offer to customers to restructure the latter’s obligations, are motivated by commercial considerations only and are not intent on making any type of actual gift to the customer, this is a key consideration – because it cannot be a gain (under the 97′ Act) it could only be taxable as a gift – except that it isn’t.

Commercial agreements entered into on an arms length basis would be outside the scope of Capital Acquisitions Tax.

Obviously the usual caveat applies whereby determining the final taxation position of the transaction would require clarification by the Revenue Commissioners, but in so far as one can reasonably interpret the existing legislation, people with debt problems who get some relief from the bank need not worry about having the improvement of their financial position being a taxable concern.

Comments

  1. idij

    Does that apply just to banks? If not it’s surely a large tax loophole in that a loan to a director can be restructured commensurate with his (in)ability to pay it back (having spent it all).

  2. Carl

    Do the same ‘rules’ apply to debt forgiveness on loan from a family member?

    For example – father loans son 300k, son buys house, son sells house 5 years later for 200k and father writes down 100k of debt

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