Many parents want to help their children a little financially. For example when purchasing a home, a car or a wedding. As parents you can offer your child a loan. But how exactly does that work and what are the (tax) rules for lending money to children?
Loan to child – Market conform interest rate
The first thing you will have to deal with with a loan is the interest rate. Parents often want to lend their child money without asking interest rate. Unfortunately, the Tax Authorities are stopping this. They say that you are obliged to ask for a interest rate that is in line with the market, at least 6 percent. If you do not do this and you do not request a lower or lower interest rate, the Tax Authorities will see this as a gift and you will pay gift tax on the “borrowed” amount.
Borrow to child for house purchase
If your child uses the loan for the purchase or renovation of his home, then he / she may deduct the interest rate from the income tax in box 1. The loan must be repaid in an annuity or linear manner within 30 years. If this is the case, it may even be attractive to request more than 6 percent interest rate. Your child may then deduct more of his income tax, while you can possibly give back (part of) the interest rate.
If your child uses the loan for the home, you must register the contract with the Tax Authorities. You do this at the moment that you do tax return for the year in question. In that case, do not forget to state the Social Security number of both yourself and your child in the contract.
Borrow money from child model agreement
If you lend money to someone, including your child (ren), it is smart to always record the agreements in a contract. That way, you and your child know where you stand and no uncertainties arise afterwards. It may sound exaggerated, but arguing about borrowed money is more common than you think. The last thing you want is a fight with your child because of a money issue.
In this contract, which you can register with a notary, you must at least state the following agreements:
- Start date
- Destination purpose
- interest rate percentage
- Way of paying off