How to make a loan to a relative correctly for the Treasury
If you are thinking of borrowing money from a close friend or family member, you should bear in mind that the Treasury also controls this type of operations. The reason is that the administration wants to avoid covert donations at all costs. If the operation is carried out correctly you will not have any problem, since formalizing a loan between individuals – for example, from parents to children – is a very easy way to leave money to a person without taking fiscal pressure.
Step One: Sign a Contract
It is very important to sign a contract and write down the operation that we are going to carry out. In this way we will be protected against the Treasury in the event that they ask us about the origin of the loan. It is not necessary to publicly write the contract, so we can save notary fees.
In any case, we do recommend that you register it and that the Administration seal it. If we are not sure about how to write the contract we can go to a specialized lawyer to take care of it. If we are going to do it ourselves we must pay attention and write down all the information that is relevant to the operation. Although it is obvious, we must not forget to write down the personal details of the lender and borrower, the amount, the term, the date, etc.
Second: Free or almost
Typically, when a private loan agreement is concluded between relatives or acquaintances, it is signed for free, that is, without interest or benefit from the lender. However, it is very important to state explicitly in the contract that the loan is free, otherwise, and in the absence of such information, the Treasury may assume that the loan is constituted with an interest equal to the legal price of money, -currently in 3 %. This characteristic is specified in article 40 of the Personal Income Tax Law. Likewise, if we choose to sign the loan subject to interest, this must also be written in the contract.
Advantages: Exempt from taxation
Non-profit loans between individuals and provided that they are made between natural persons (not companies), are subject to personal income tax but at the same time exempt from taxation. This basically means that these types of loans must pay the expenses of patrimonial transmissions – they must appear and be reflected in your personal income tax – but you do not have to pay any amount since these types of operations are exempt from taxation.
To carry out this operation, the borrower (the person who leaves the money) must pay the tax at the corresponding tax settlement office and the self-assessment will be done on form 600. It is mandatory to present the original contract, whether it is a private document as if notarial deeds have been written for your signature.