Loan Between Particulars

Insurance throughout our lives we have borrowed money or have borrowed money from a relative or even a friend.

In the case that we want to lend the money or want to lend it to us, we can think that with our money we can do what we want, that’s why we work hard to achieve it.

Well, this statement is not entirely true, the loans between individuals have their taxes as well as normal personal loans .

LOAN BETWEEN INDIVIDUALS: HOW SHOULD BE DONE ACCORDING TO FINANCE?

LOAN BETWEEN INDIVIDUALS: HOW SHOULD BE DONE ACCORDING TO FINANCE?

Hacienda is always aware of this kind of operations, and sometimes they do not like it very much.

So if we think about lending money to a relative or a friend, the best thing to cover our backs and not be victims of the Treasury is to leave everything well formalized in relation to the loan between individuals.

Many think that a loan between friends or relatives is considered in the Treasury as a donation.

This is wrong, also if a donation was the tax operation before the Treasury and the corresponding taxes would have to be paid for the concept of donation.

Then, the loan is considered by hacienda as a transfer of own capital to a third party.

This ” transfer of own capital to a third party ” has as its final objective to be returned within the agreed term, through the quotas stipulated and, in case of having set interests, adding the agreed interest.

Nobody obliges us to charge interest to our relatives or friends by lending them money, but everything must be specified to avoid misunderstandings with the Treasury.

For that reason it is very advisable that if we are going to make a loan between individuals we will make a written contract.

If there is no contract, and the Administration decides to investigate, it may consider it a donation, forcing us to pay the corresponding taxes.

In addition, making a written contract has more advantages, since it is considered a binding element if the payer does not meet its quotas to make a legal claim.

Not only can we claim the debt judicially, but in case the borrower or lender dies, it can be transferred in inheritance.

What are the steps to follow to make the contract legal?

What are the steps to follow to make the contract legal?

We must follow two main steps to legalize the loan between individuals : write the contract and record the loan contract.

  1. First is to draft the contract 

We can choose to carry out the contract in a private way, based on the innumerable models that exist on the internet or to make the contract in a notary, using their advice and contract models. Be that as it may, the contract must have the following sections:

Date and place of the contract

We must specify in the contract the date to which it is signed and where, as a general rule with putting the municipality is sufficient.

The amount of the loan

In the contract it must be clear the total amount that will be lent, so that after there are no misunderstandings or problems.

The data of the borrower and the lender (and if there were, guarantors)

The data, both the lender and the borrower, and even if there is a guarantor, must be as complete and clear as possible, since at the time of registration it will be necessary to prove who are each of the parties.

The return period and the amount either full payment or in installments

We must agree with the other party involved in what way, when and how, the payments will be made and if there are interests in which way they will be paid.

The most normal thing is that the borrower makes the monthly payments, although they could also be biweekly, quarterly, annual or even up to the full payment, without a deadline.

We must not forget that we must reach an agreement and that the dates and amounts are realistic and take into account the real economic possibilities of the borrower.  

Interest on the loan

This last step is essential to indicate it very specific in the contract, and in the event that we do not want to charge interest to our friend or relative we must specify that the interest is 0%.

If we do not do so, Hacienda could assume that the lender will receive a consideration and therefore apply a 3%, the lien to the legal interest of the money in 2016.

  1. Finally we must register the contract and liquidate the ITP

Once the contract has been drawn up, we must register it and pay the ITP or Patrimonial Transfer Tax in the office that corresponds to us geographically.

That we have to liquidate the ITP does not mean that we have to pay a tax for making a loan between individuals, but we must present the stipulated documentation attaching a model 600, but for free.

Summary

Following these steps we can be sure that the Treasury does not take us with an irregularity and we have to face a fine.

Since we will do it, almost certainly, as a favor to a friend or relative, that less than doing things well to avoid getting into trouble and paying fines.

Undoubtedly, making things as legal as possible in the long run is always cheaper, so when it comes to making a loan between individuals we have to be careful.