Many parents want to give their children a little financial help towards their study costs, to reduce their monthly outgoings, to buy a home, or to start or take over a business. Such financial support is often necessary, as the rules for obtaining finance require a personal contribution. A simple and effective way to provide that financial support is to gift money or other assets.
Gift tax and exemptions
The child is liable for gift tax on everything you give them. Fortunately, however, there are many exemptions from this tax, which we explain in our Factsheet: “Gift Tax Exemptions”, and tax-efficient forms of gifting.
How do you go about putting that financial support into practice? How do you incorporate this into your financial and estate planning?
A higher rate applies to people with assets AWBZ personal contribution. The 8% amount from your Box 3 assets, in excess of the tax-free allowance, is counted as additional income when calculating your personal contribution. All the more reason to think about your estate planning!
Gifting in recognition of a debt
You do not yet wish to, or are not yet able to, give your child the full amount of the gift in cash. In that case, you can make a “gift on paper’: an acknowledgement of debt out of generosity (to be recorded in a notarial deed). You acknowledge that you owe your child a sum which will only become payable after your death.
The advantage is that you retain access to the gifted assets, whilst still benefiting from the gift tax exemptions and rate differences. Of course, you are free to make repayments on the loan in the meantime and thus provide your child with the cash after all.
To also save on inheritance tax with this gift, you must actually pay your child (at least) 6% in interest each year. This can fit in perfectly with your financial planning. Your child will then receive this financial support annually through this interest and, where applicable, additionally through capital repayments.
Gifting subject to conditions
A gift may inadvertently end up with your child’s in-laws through the matrimonial property regime or a cohabitation agreement. You can prevent this by including an exclusion clause in the gift, ensuring that your gift remains the property of your child.
Gifting assets to your child may, at some point, put a strain on your financial situation. If you wish to make a gift without becoming financially dependent on your child, you can also make the gift on the condition that you are able to revoke it.
Business succession within the family
Would you like to transfer all or part of your business to your child? Under the Business Succession Facility (BOF) within the inheritance and gift tax regime, you can transfer the business assets or your substantial interest shares to your children in a tax-efficient manner. The BOF applies only to active businesses, not to investment activities.
The BOF is a conditional exemption of 100% of the value, provided that the value of the business does not exceed €1,060,298 (2016). For the excess amount, the reduction is 83%. A ten-year interest-bearing deferral may be granted for the gift tax still due. The scheme is subject to conditions, including those relating to the holding period for you as the donor and the continuation of the business by the recipient.
Family loan
Of course, you can also lend money to your children. After all, it is still difficult – even for your children – to secure a loan from a bank. With interest rates on your savings so low, a family loan can quickly become an attractive option.
Do ensure that you draw up formal agreements and clearly set out the terms and conditions, such as interest, term, repayment, use of the funds, callability, grounds for termination and any security. This ensures financial and legal clarity for both you and the child and often prevents unnecessary tax complications.
Mortgage
You can lend your child money, by means of a notarial or private deed, for the purchase, renovation or maintenance of their own home. You will receive interest from your child on the loan. For you, the (commercial) loan forms part of your Box 3 assets, meaning that the interest you receive is tax-free. For your child, however, the interest paid is tax-deductible as mortgage interest on their own home.
From 1 January 2013, the new rules on mortgage interest relief will also apply to home loans within the family. Such loans must therefore be repaid in full within thirty years, using at least an annuity repayment plan. A transitional arrangement applies to home loans existing on 31 December 2012.
Note! It may be advisable to stipulate a security interest in respect of the loan. Not only to ensure repayment, but also to substantiate the business nature of the transaction for tax purposes. To register a mortgage, you will need to visit a notary.
Loans and gifts via a round of contributions
You can provide your child with additional financial support by, for example, topping up their mortgage with a ‘cash injection’. In the same year that your child pays you the interest, you make a gift of an amount within the annual gift tax allowance (2016: €5,304). With a home loan, your child benefits from the tax-deductible interest and the tax-exempt gift, whilst you receive the interest tax-free and can return (part of) the interest tax-free. Incidentally, the gift and the interest payment must be separate and must not be offset against each other. Otherwise, the tax benefit will be lost.
Security
If your child is unable to secure an (additional) loan from a bank on their own, you, as a parent, can act as a guarantor. You can do this for the entire loan or just part of it. This provides the bank with additional security. By acting as a guarantor for a mortgage loan, your child retains the right to claim mortgage interest relief.
Tip: If your child is planning to set up their own business, a loan might be the obvious option. But perhaps taking a stake in your child’s start-up as a financier could be beneficial for both of you. There are many ways to arrange this. Do ask us!