How to make a loan between family members correctly?

It is very common for parents to want to help their children financially to buy a car or a first home. But this financial assistance will involve a legal transaction for the tax authorities and you must be very clear about the tax consequences that will arise in order to avoid unpleasant surprises.

Differences between a donation and a loan

Well, when parents give money to their children, they can do so in two ways: expecting the money to be returned or without expecting it to be returned.

- If they do not expect the money back, it is a donation and they will have to pay Gift Tax, which varies according to the Autonomous Community where the person receiving the money resides. Many autonomous regions regulate reductions or allowances that considerably reduce taxation. However, in many cases it will be necessary to go to a notary in order to qualify for the application of the tax advantages.

- In the event that the repayment of the amount paid is foreseen, we will be dealing with a loan and, in order to avoid tax risks, you must follow some very specific steps.

Steps to make a loan correctly

Save the receipt.

The bank transfer must be made and the receipt proving the transfer must be kept.

Loan contract.

A loan contract must be drawn up and signed, dated the same day as the transfer is made. This contract must include, as a minimum, the following issues:

1.Parties involved:

It must be clearly stated who is the borrower and who is the lender.

2. Amount of the loan:

Another crucial aspect is to define the amount of the loan and it must be stated that no interest will be charged.

3. Repayment of the loan:

The way in which the money is to be repaid is one of the essential elements of the contract. It is not necessary to specify a periodic instalment, but you can choose to establish that it will be repaid before a certain date. Compliance with the agreement is mandatory.

4. Deadline for repayment of the loan:

It must be clear when the contract is due, i.e. what is the last day to comply with the contract.

5. Contractual default:

It is highly recommended to establish the consequences in the event that the borrower does not comply with the repayment or the repayment deadline.

Legalisation of the document.

The loan contract by itself is proof. However, as it does not require the intervention of a notary, we do not have true proof of the date on which it was actually made. However, it is compulsory to present it to the tax authorities, which will get the document legalised.

In fact, it is a contract that has fiscal consequences because it is subject to taxation by the Transfer Tax and Stamp Duty in the modality of Onerous Transfer of Property, which depends on the Autonomous Communities. However, it is an act exempt from taxation. It is only necessary to present the contract together with form 600 to the competent Autonomous Community Tax Office without making any payment. In this way, you will obtain a double advantage: on the one hand, you will comply with your tax obligations and, on the other hand, you will obtain proof that a public official has had knowledge of the existence of this contract.

At this point, if any public administration requires information on the transfers, the contract and form 600 can be provided as indisputable proof, so there is no tax risk whatsoever.

In conclusion, any financial assistance that you intend to give to your children will entail a series of tax obligations, so you should be clear about the steps to follow to avoid any surprises with the Administration.

If you need us to draw up a loan contract for you, contact us!