The family loan is a possibility in Dutch rules and regulations. Could this be more favourable?
Family loan
A loan is a loan, whether between you and a bank or you and your family. A loan is an:
– agreement to loan an amount,
– for which interest is charged and
– a repayment schedule is in place. If one of these criteria is missing, it is not a loan, but for instance capital.
Interest
A normal interest percentage needs to be set. What is normal depends on what interest percentage a bank would have charged under the same conditions. The problem in this case is that often the family is taken out, as the bank is not willing to loan, let alone provide an offer with an interest percentage.
The court has ruled that family do not need to make the same profit as a commercial bank. That implies the normal interest can be to a lower percentage.
The interest can also be a higher rate. The tax office will then investigate what is the reason for this higher interest. A reason could be that no collateral is provided.
The interest of a loan taken out for the purchase of a home is only tax deductible, if the repayment period of the loan does not exceed 30 years.
Court case
In 2018 a family loaned against 9% interest for a house. The tax office argued that the 9% was too high. The correct interest percentage was 4,5%. The tax office won this case.
The nasty aspect of this case was not addressed by the court, but later by the minister of finance. The 9% interest was part of an annuity that would pay back the full amount in 30 years time. By dismissing the 9% as too high, the correct percentage was now 4,5%.
You would imagine that less interest implies more repayment. That is not the case. 4,5% interest was dismissed from the annuity and the result was that not enough was paid back over a 30 year period to repay the full loan. The consequence of this lower interest verdict is no only less interest deductible. The consequence can be that no interest is deductible at all, as the loan no longer meets the 30 year repayment condition.
The solution in such agreements is to put in a condition that if the interest percentage is not accepted by the tax office, the balance between the accepted interest and agreed upon interest is to regarded an additional repayment of the loan.
Why a family loan?
Doing business with your family is only fuel for the traditional family fights. Then again, if the bank keeps on reducing the amount you can keep in your bank account penalty free. The stock exchange might be at the top already. Slick investment sellers are a risk on their own. Why not leant your family?
To avoid unnecessary risks of not being repaid, a mortgage can be put on the house by you. Then there is nearly no risk for you.
Tax is exciting
We think tax is exciting. Loaning money is not our business. Taking into account in the tax return the interest deduction (box 1) or the loan receivable (box 3) is our business. Hence we touched the subject of a family loan. It is possible, at slightly better conditions than a bank offers. Do not get too creative, as the tax office is on the lookout for too generous loans or strange conditions.
