One of the most common ways to help children to acquire a home, but also for other purposes such as financing business or vehicle purchases is through a donation of money or a family loan. Donations of less than 3,000 euros are not subject to tax.
Loan or donation?
When giving money for the purchase of a home, it is essential to formalize the agreement correctly, whether it is a donation or a loan, to avoid tax problems and comply with the regulations.
When we talk about a donation, it is a gift of money with no expectation of reimbursement, so it must be declared and pay the Inheritance and Donations Tax, which varies according to the autonomous community. In many cases, this tax is subsidized, which means that the tax burden can be reduced.
Both donations and loans between relatives must comply with certain legal requirements. In the case of a loan, it must be repaid within the agreed term, with or without interest, which implies its recognition as an agreement between private individuals.
Loans for the purchase of a home
One of the most common situations in which a parent lends money to a child is to help with the purchase of a home. Banks usually finance up to 80% of the value of the home, leaving buyers to cover the rest. In these cases, family members often step in to lend the amount needed to complete the transaction.
This type of loan is not limited to parents and children, it can also occur between spouses or from children to parents, and in all cases it is important to formalize the loan. A loan contract that meets certain requirements must be drafted and signed.
How to properly document a loan between family members: Form 600
Once the contract has been signed, it is mandatory to file Form 600 with the Tax Authorities. Although this type of operation is exempt from payment, the procedure is necessary to avoid the loan being interpreted as a donation.
Important aspects to bear in mind:
- The person responsible for filing Form 600 is the borrower, i.e. the person receiving the money.
- It must be filed at the Tax Office of the Autonomous Community where the borrower resides.
- There is a period of 30 days from the receipt of the money to file the tax return and it is necessary to bring a copy of the signed loan contract.
How to formalize a loan between relatives?
A loan between relatives can be formalized by means of a private contract, although it is not necessary to go to a notary, this provides greater legal certainty. The contract must include:
- Date of the signing of the contract
- Details of the lender and borrower
- Amount of the loan
- Interest rate: It is crucial to specify whether or not the loan will bear interest. Even if 0% interest is agreed upon, it should be reflected in the contract.
- Repayment term
- Form of repayment: It must be specified how the repayment will be made, preferably through bank transfers so that there is a record of the movement of money.
- Default clauses: It is advisable to include a clause determining the steps to be taken in the event that the borrower defaults on payment.
The importance of good advice
Making a living donation is a legal act with important tax and inheritance implications, which can generate future conflicts if not properly managed. Therefore, it is essential to have the advice of a specialized lawyer to ensure that the most appropriate formula is chosen and that all current regulations are complied with.
If you have any doubts in this regard, our team of civil lawyers and tax advisors can guide you:
What happens if the loan is not formalized?
Whether it is a donation or a loan, it is advisable to formalize the transaction by means of a public document, such as a deed before a notary, although this is not mandatory. The intervention of the notary offers greater legal certainty and helps to prevent possible conflicts in the future. In addition, the notary can manage the processing of the Form 600, which is necessary to liquidate the corresponding tax. Alternatively, if a notary is not consulted, the borrower must file the Form 600 with the regional tax authorities within the established period.
If a loan between relatives is not formalized correctly, the Treasury could understand that it is a donation and demand the payment of the Inheritance and Gift Tax. In addition, if the loan is not declared, the lender could face tax problems, since the Tax Agency could impute a legal interest on the money, although no interest has been agreed.
In the case of a loan for the purchase of a house for example, if it is not properly formalized, the borrower could have difficulties to justify to the Tax Authorities the origin of the funds, which could result in tax penalties.
To avoid these problems, it is important that the loan is properly documented, either by private contract or public deed, and that payments are made in a transparent manner, preferably by bank transfers that leave a trace.
Parent-to-Child Gift Tax Rates
Loans between family members are subject to Transfer Tax, in its modality of corporate operations, if no interest is stipulated or if it is lower than the market rate. However, the regulations establish that if it is a loan between individuals (such as between parents and children) and does not generate interest, the transaction is exempt from payment of this tax in many autonomous communities. In others, the taxation is symbolic and is usually applied at a reduced rate, generally 1%.
The Inheritance and Gift Tax (ISD) establishes that gifts between family members are subject to taxation. In the case of donations between parents and children, the tax rate depends on the value of the donation and the autonomous community where the transaction takes place. At state level, the taxable base is taxed at progressive rates ranging from 7.65% to 34%, depending on the value of the donation.
The donation must be formalized in a public deed before a notary public, and the recipient must file Form 651 with the Tax Agency. If the donation is of real estate, the tax will be calculated on the real value of the property.
Calculation of the Inheritance and Gift Tax:
The amount of the tax varies depending on the relationship between the donor and the recipient (children, parents, siblings, etc.) and the autonomous community. Generally, the closer the relationship, the less tax is paid. The autonomous communities usually offer bonuses or important reductions for donations between direct relatives. Each autonomous community offers different bonuses.
If the donation is stipulated in public deed in general terms the applicable tax rates will be 5%, 7% or 9% depending on the amount.
In order to know which tax relief will be applied in your case, you can contact us and we will advise you:
If the payment of the Personal Income Tax (IRPF) is delayed.
The donors (the parents, in this case) must declare the capital gain resulting from the difference between the acquisition value of the property and its value at the time of the donation. This increase in wealth is taxed in the IRPF and, sometimes, it can be a considerable amount, especially if many years have passed since the acquisition of the property.
Donations to married children
Even if the child is married in community of property, the assets donated by the parents are considered to be the child's personal property. This means that the donated asset, whether it is an apartment, premises or land, belongs exclusively to the child.
If the donation is in cash and the child uses that money later to buy a property, it is necessary that the spouse declares before a notary that the money used is privative. Otherwise, it is presumed that the property acquired will be community property.
Tax on the Increase of the Value of the Goods of Urban Nature (Municipal Capital Gains Tax)
When the donation includes a property of urban nature, the beneficiary is also obliged to pay the Municipal Capital Gains Tax. This tax applies to assets such as houses, premises, garages or urban land, but not to rural land.
The term to liquidate the Plusvalia Municipal is also 30 working days from the date of the donation, and this tax is managed by the Town Hall where the property is located.
Conclusion
Both donations and loans between relatives represent useful alternatives to support a relative in the purchase of a house or in other projects, as long as they are formalized correctly. The choice between a loan or a gift should be based on the tax and legal implications of each option, as well as the personal relationship and the purpose of the transaction. Formalizing these agreements through clear contracts and complying with tax obligations, such as filing Form 600 for loans, is essential to avoid problems with the Treasury and ensure legal certainty. Having the support of a specialized advisor is key to manage these procedures and optimize the tax impact for the benefit of both parties.
If you have doubts about how to manage a loan between family members or a donation and you need legal advice to formalize the agreement, it is advisable to turn to an expert in the field to ensure that you comply with all tax regulations.
