How interest-free loans between family members work in Spain
Young people in Spain often struggle to buy their first home due to lack or earnings and savings, and if they do secure a mortgage they face sky-high interest rates. One way around this is an interest-free loan from 'the bank of mum and dad'.
It’s no surprise that young people in Spain are struggling financially, particularly when it comes to getting on the property ladder and saving up enough for a deposit on a house.
A report published in April 2023, entitled Prospective Study on Employment and Youth in Spain, by the NGO Ayuda en Acción revealed that 64 percent of young people between the ages of 18 and 34 in Spain continue to live with their parents, unable to move out because they can't afford to.
According to Trading Economics, unemployment figures in Spain were at 13.26 percent in the first quarter of 2023, and the rate of joblessness among the young is even higher. Add this to skyrocketing inflation, and it's not hard to see why saving enough for a deposit can seem almost impossible for many.
As a result, young people in Spain often struggle with being approved for mortgages and bank loans, unable to meet the 20 percent down payment many institutions ask for.
Many are forced to turn to 'the bank of mum and dad' for financial help, and loans or donations between family members are becoming more and more common.
READ ALSO: Spain's govt to act as first home guarantor for young people and families
If you want to help a family member out by giving them a gift or a donation and don’t expect to be repaid, you must remember that this will be subject to various taxes such as Property Transfer Tax or Capital Gains Tax if the gift is in the form of a property, and Personal Income Tax if the gift is money.
In order to avoid this, many families are turning to interest-free loans instead, where repayments are involved.
Loans between family members (or any other individuals) in Spain are governed by the same rules as those made by financial institutions.
Loans can be exempt from tax and interest, however, they must be formalised in order to avoid problems from the tax authorities.
READ ALSO: How much do I need to earn to get a mortgage in Spain?
Even if the loans are between family members, a contract must be drawn up that clearly sets out the conditions for the repayment of the loan. In addition, the Hacienda or Treasury must be notified about it, even though you won’t be taxed on it.
It's not necessary to formalise the contract before a notary, but a private contract should be drawn up that will have the same validity.
The contract should include:
- Personal data of the lender (the parent, in this case) and the borrower (the child).
- The total amount of the loan.
- The interest rate of the loan. Although this is an interest-free loan, it is important to indicate in the contract that it is 0 percent.
- Terms of repayment.
- You can also add the possibility of early cancellation of the loan.
- Date and signature of both parties (ie. parents and child).
It is possible to add clauses in the case of non-payment too. For example, you could put the property up as a guarantee. If you choose this option, the contract will have to be signed in front of a notary.
Keep in mind, even if this is between family members, the contract is legally binding, so you must do whatever is best for you and your children.
Experts recommend that repayments should be made by bank transfer, so there is a record that the borrowed money is being returned.
This will help you in case the tax authorities ask questions. If paying by bank transfer is not possible, repayments can also be paid in cash, but both parties must sign a receipt so there is still a record.
Informing Spain's Hacienda tax agency
As mentioned above, it’s important that you inform Hacienda of the interest-free loan, so that they don’t tax it like a gift.
When you sign your contract, it's important to make three copies. One must be given to each party ie – the parents and the child and the third to the Spanish taxman.
It is the responsibility of the borrower or the child to inform the authorities. They must do this by filling out modelo or form 600, specifying that it was a loan between individuals.
The form should be submitted to the relevant tax authorities in your region of Spain within 30 days of receiving the loan.
As a general rule, Spanish tax authorities must be notified of any loan amounts over €3,000, but many people only inform them if it’s over €10,000 or €20,000, large amounts that can draw attention to you.
To be on the safe side, you should inform them of any amount over €3,000.
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It’s no surprise that young people in Spain are struggling financially, particularly when it comes to getting on the property ladder and saving up enough for a deposit on a house.
A report published in April 2023, entitled Prospective Study on Employment and Youth in Spain, by the NGO Ayuda en Acción revealed that 64 percent of young people between the ages of 18 and 34 in Spain continue to live with their parents, unable to move out because they can't afford to.
According to Trading Economics, unemployment figures in Spain were at 13.26 percent in the first quarter of 2023, and the rate of joblessness among the young is even higher. Add this to skyrocketing inflation, and it's not hard to see why saving enough for a deposit can seem almost impossible for many.
As a result, young people in Spain often struggle with being approved for mortgages and bank loans, unable to meet the 20 percent down payment many institutions ask for.
Many are forced to turn to 'the bank of mum and dad' for financial help, and loans or donations between family members are becoming more and more common.
READ ALSO: Spain's govt to act as first home guarantor for young people and families
If you want to help a family member out by giving them a gift or a donation and don’t expect to be repaid, you must remember that this will be subject to various taxes such as Property Transfer Tax or Capital Gains Tax if the gift is in the form of a property, and Personal Income Tax if the gift is money.
In order to avoid this, many families are turning to interest-free loans instead, where repayments are involved.
Loans between family members (or any other individuals) in Spain are governed by the same rules as those made by financial institutions.
Loans can be exempt from tax and interest, however, they must be formalised in order to avoid problems from the tax authorities.
READ ALSO: How much do I need to earn to get a mortgage in Spain?
Even if the loans are between family members, a contract must be drawn up that clearly sets out the conditions for the repayment of the loan. In addition, the Hacienda or Treasury must be notified about it, even though you won’t be taxed on it.
It's not necessary to formalise the contract before a notary, but a private contract should be drawn up that will have the same validity.
The contract should include:
- Personal data of the lender (the parent, in this case) and the borrower (the child).
- The total amount of the loan.
- The interest rate of the loan. Although this is an interest-free loan, it is important to indicate in the contract that it is 0 percent.
- Terms of repayment.
- You can also add the possibility of early cancellation of the loan.
- Date and signature of both parties (ie. parents and child).
It is possible to add clauses in the case of non-payment too. For example, you could put the property up as a guarantee. If you choose this option, the contract will have to be signed in front of a notary.
Keep in mind, even if this is between family members, the contract is legally binding, so you must do whatever is best for you and your children.
Experts recommend that repayments should be made by bank transfer, so there is a record that the borrowed money is being returned.
This will help you in case the tax authorities ask questions. If paying by bank transfer is not possible, repayments can also be paid in cash, but both parties must sign a receipt so there is still a record.
Informing Spain's Hacienda tax agency
As mentioned above, it’s important that you inform Hacienda of the interest-free loan, so that they don’t tax it like a gift.
When you sign your contract, it's important to make three copies. One must be given to each party ie – the parents and the child and the third to the Spanish taxman.
It is the responsibility of the borrower or the child to inform the authorities. They must do this by filling out modelo or form 600, specifying that it was a loan between individuals.
The form should be submitted to the relevant tax authorities in your region of Spain within 30 days of receiving the loan.
As a general rule, Spanish tax authorities must be notified of any loan amounts over €3,000, but many people only inform them if it’s over €10,000 or €20,000, large amounts that can draw attention to you.
To be on the safe side, you should inform them of any amount over €3,000.
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