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How do you protect yourself when lending money to family or friends?

How do you protect yourself when lending money to family or friends?
  • Published on : 23-05-23
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If you are looking to help a close friend or child financially, but do not wish to make a donation, a loan may be an interesting alternative. However, you must draw up a written loan agreement if you lend a sum of more than €3,500 to a family member or friend. This is compulsory to prove the agreement between the parties in the event of a dispute or the death of the lender. This agreement can be drawn up privately, so there is no need to go to a notary.

The loan agreement must contain the following information:

  • Name and address of the lender and borrower ;
  • Amount loaned in figures and in words;
  • Confirmation from the borrower that he/she has received the sum loaned;
  • Duration of the loan: if not, the creditor may ask for the money back at any time;
  • Interest rate, if applicable, including interest on late payment;
  • Resolutory clause, i.e. in the event of default, the sum loaned must be paid;
  • Number of copies of the agreement: each party must have an original copy of which the number of copies is indicated;
  • Place and date of signature by all parties, with a handwritten signature.
  • Intra-family loans are often granted interest-free, so it is advisable to state "loan granted interest-free" in the loan agreement.

Repayments are usually made by bank transfer to avoid arguments. If repayments are made in cash, it is important to draw up a receipt and keep a written record of the progress of repayments.

It is also advisable to register the loan agreement with the authorities to avoid disputes.

If you want to release the debtor from repayment of the loan, you can forgive the debt. However, depending on the circumstances, this may be regarded as a gift.

If you use a joint agreement to remit the debt, no gift tax is payable in principle. However, if you die within three years (five years if you live in the Walloon Region) of the date of the covenant, the person benefiting from the debt forgiveness will have to pay inheritance tax.

If you register the gift or have the deed of gift drawn up by a notary, the person concerned will then have to pay gift tax. If you die after three years (or five years in the Walloon Region) following the (unregistered) deed of gift, no inheritance tax will be payable.

There is also the possibility of forgiving the debt in a will, in which case the borrower will not repay the loan but will have to pay inheritance tax.

If you die and you have not written off the debt, the amount of the loan will revert to your heirs, who will then have to pay death duties.

In conclusion, it is advisable to write off the debt during your lifetime by means of a joint agreement or notarial deed if you intend to do so, as gift tax is generally lower than inheritance tax.

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