It is not just a rarity that loans are made between family members. In fact, this is something that often happens. Most often it is a loan between parents and children, but it is often also a loan between grandparents and grandchildren. If you want to accept or offer a family loan, there are a number of things you should be able to control.
There shouldn’t be any problems with the tax part, but there are still a number of things to keep in mind as there are some different pitfalls. If you want to be sure that things are not going wrong, then it is important to prepare thoroughly. Fortunately, you can learn everything you need to learn in this article.
In the vast majority of cases, a family loan is granted because the lender has a desire to be able to provide the borrower with some form of financial handing on terms that are more lenient than, for example. in the bank. Therefore, it is also very rare that there is interest on a family loan. upfront fees.
As a result, it is therefore much cheaper to borrow money from someone you are family with instead of going to the bank or finding a loan online. In such a case, there will be a wide range of different expenses associated with your loan. It ultimately makes it an expensive pleasure to borrow money.
Should there be interest on a family loan?
There is no problem in providing an interest-free loan to someone you are related to. If you do not, then you should also not pay tax on interest income, as is otherwise the case. On the other hand, however, the borrower cannot benefit from a deduction on the interest rate, as would be the case with a loan taken up in the bank or similar.
However, there is also no requirement that the borrower have to pay either gift tax or income tax on the saved interest expense. Therefore, there are of course the advantages and disadvantages of an interest-free loan. In most cases, however, this is preferable, as there is a lot of money to be saved by choosing an interest-free loan.
There are many family loans that are interest-free, but this is not a requirement. If there is an interest rate on the loan, the two parties can easily agree on this. In that case, however, they are both required to report the annual interest rates to SKAT. Here, the borrower must also report to SKAT, who is the lender.
Repayment on a family loan
If you have a desire to provide an interest-free family loan to a member of your family, then it should be established as a overnight loan. It is a loan where there is no further agreement on how the debt should be settled. If you do not do this, but choose to agree that the loan should be settled over 10 years, then it can give gift tax.
Therefore, it is also clear to the borrower that this is done in this way so that he or she can just avoid this gift tax. It is a tax that will be calculated on the basis of the difference between the loan amount and the real value of the debt. Therefore, this should of course also be avoided.
A so-called overnight loan means that the lender actually has the opportunity to claim the debt repaid with just one day’s notice. However, this does not mean that the lender must necessarily do this. It can be a long-term loan that can last several years if you want to give the borrower plenty of time to repay.
However, nothing prevents the borrower from paying down the debt. There is no requirement for fixed repayments, a specific maturity or other. In the vast majority of cases, it is therefore best to enter into an agreement on a current loan. That makes it an easier situation for both parties.
Remission of Family Loans
Of course, there are some tax consequences that need to be considered if you want to forgo a family loan. However, it is difficult to give a concrete indication of these consequences, as it depends on the financial circumstances of the borrowers. Therefore, it is not always a good idea to give up such a loan to the borrower.
If the borrower is insolvent and is therefore unable to pay, then such a waiver – as a starting point – is without tax consequences for either party. If, on the other hand, this is a borrower who could well have repaid all or part of the loan, then there will be some tax consequences.
Whether it is a gift tax or income tax depends on the relationship with the lender, as it will be a gift if the lender chooses to give up the loan to the borrower. Therefore, it is also something that should be taken into consideration when considering abandoning the loan, rather than simply letting it be a standing loan.
Can act as an alternative to inheritance advances
There is nothing in the way of using an interest-free family loan as an alternative to an inheritance advance or a cash gift. In fact, it is possible to postpone (or even completely avoid) having to pay either a gift or inheritance tax (also called a housing tax). However, it requires the loan to be put together properly.
In this connection, however, it is important to be aware of the requirement that a lender must be able to demand that the debt be repaid within 24 hours. However, it must not be clear in advance that it is a loan that is not repayable. If so, it may actually prove to be less favorable than a legacy.
However, the above is mainly in case the borrower e.g. is a nephew or niece who is not covered by the general gift tax circle.