Home loan from the parents
April 7, 2011 | 30,00 EUR | answered by Michael Herrmann
Dear experts,
I request answers to the questions for the following scenario:
Married couple (56, 61 years old) with 2 children (24, 26 years old) wants to provide a private loan to the older son for the purchase of a property.
Plan:
Purchase of a condominium including utilities €240,000;
Child's equity €30,000;
Private loan €210,000;
The parents are rather against renting to the son in combination with a bank financing and the associated tax benefits.
It is important for the parents to have security in the form of a mortgage and for BOTH children to be treated equally in the inheritance.
The monthly payment should represent a second pension.
Parents' assets:
€200,000 life insurance (recently paid out, to serve as a loan)
€220,000 savings balance
€250,000 semi-detached house (approx.)
€150,000 future inheritance payments (approx.)
The interest rate for the €210,000 loan should be around 3%.
I am already aware that a loan to family members must withstand a "third-party comparison". If an interest rate is agreed that is below around 5.5%, the difference may be considered a gift. !?
My questions:
1. As I understand it, the interest income of my parents is subject to capital gains tax, as it is interest from capital assets. Is there a difference in this case between relatives and unrelated individuals?
2. The inheritance tax exemptions (€400,000 per child) renew every 10 years as far as I know. Wouldn't it be the best solution tax-wise to choose an interest-free loan to save on capital gains tax? The gift of interest could then be offset between the two children in case of inheritance. Is this option permissible if properly documented with a loan agreement?
3. Is there a better solution available?
Dear inquirer,
First of all, thank you for your inquiry, which I am happy to answer based on the information provided and in the context of your commitment to an initial consultation. The response is based on the facts presented. Missing or incorrect information about the actual circumstances can affect the legal outcome.
The question of whether the principles of the flat-rate tax apply to interest on loans between relatives is currently disputed. Currently, the prevailing opinion is that the interest from loans between relatives corresponds to the "normal" tax rate of the receiving person and not the (possibly) more favorable flat-rate tax rate of 25%. A proceeding regarding this matter is pending at the Lower Saxony Finance Court under Ref.: 15 K 417/1.
It is undisputed, however, that your interest income is subject to income tax. Therefore, it is only about the flat-rate tax rate of 25% plus solidarity surcharge and church tax or the progressive income tax plus solidarity surcharge and church tax.
Regarding the agreed interest rate, I can assure you. Since your son uses the condominium for his own residential purposes, he cannot deduct the interest expenses for tax purposes, so there is no expected disadvantage for the tax authorities. Therefore, no abuse of tax planning can be assumed. Additionally, the provision of an interest benefit does not constitute a gift. Therefore, it is tax-efficient to provide an interest-free loan to avoid taxation of the interest on your end.
Therefore, the granting of the loan is not relevant for gift or inheritance tax purposes. The inheritance tax exemptions can indeed be claimed every 10 years, so it is advisable to consider making gifts now in order to avoid a tax burden on the heirs in the event of inheritance.
The offsetting of the interest benefit in a future inheritance case can also be regulated through a legacy to the second child. In this case, the legacy would be allocated to the legatee before the distribution of the residual estate.
This forum serves for tax advice on specific issues as an initial assessment. Therefore, a comprehensive tax planning consultation cannot be provided here.
I hope that these details have given you a sufficient overview of the situation within the scope of your commitment and this initial consultation, and remain
Yours sincerely,
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax Advisor
