What is a Preferential Loan?
A preferential loan is a loan made from the employer to the employee, former employee or their spouse on which no interest is applied, or interest is payable at a rate lower than the specified rate.
A preferential loan is a taxable benefit-in-kind. Your employee must pay PAYE, PRSI & USC on the benefit.
How the Benefit is Calculated:
The benefit is calculated as notional pay for the relevant tax year. It mirrors the interest that would have been charged if there was no connection between the two parties.
The value of the benefit is the difference between:
- The interest actually paid by the borrower in a year
- And the specified rate for that year.
There are various methods used to determine how interest can be calculated on a loan:
- On a reducing balance basis
- By reference to the amount outstanding at the start of each year
- By reference to the amount outstanding at the mid-point of each year.
What is a Qualifying Home Loan:
A qualifying home loan is a loan used by your employee to purchase, repair and expand their residence. It is used by your employee, a former spouse or civil partner of your employee or a dependent relative of your employee.
If the loan is a qualifying home loan, the employee must sign a statement confirming this.
The Specified Rates according to the Department of Finance are:
- Qualifying home loan – 4%
- All other loans – 13.5%
For more Benefits and Allowances read:
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