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It is not uncommon to borrow money from parents, siblings or friends. Many people are not aware that this can lead to a gift for tax purposes and that considerable taxes can be incurred as a result.

Loan as taxable gift in case of non-standard interest rate

Thus, in its ruling of 27 April 2022, 3 K 273/20, the Mecklenburg-Western Pomerania Regional Tax Court decided that a taxable gift exists if a loan is not granted at a customary interest rate. In the case of the judgement, the son was appointed by the father as the sole heir of the agricultural farm and the daughter had claimed her compulsory portion against the brother. Since the brother could not pay this, a loan agreement was concluded between the siblings. This provided for an interest rate of 1 per cent with an unlimited term. The brother had had two loan offers made to him to prove that they were in line with the market.

Statistical values of the Deutsche Bundesbank serve as a benchmark

However, the tax office and subsequently the tax court came to the decision that the loan offers could not be taken into account, as they differed from the loan granted with regard to the term, maturity and repayment and were not already available when the contract was concluded. The tax court had used statistical values of the Deutsche Bundesbank as a standard of comparison, which were interest rates of 2.67 per cent and 2.81 per cent. Therefore, the tax court considered the low interest rate on the private loan to be a gift - and used the statutory interest rate of 5.5 per cent according to section 15, paragraph 1 of the Valuation Act as the market interest rate, irrespective of the statistical values.

It pays to compare: gift tax becomes due if the interest rate is not customary

The difference of 5.5 percent to the interest rate of 1 percent is thus considered a gift, according to the tax court.

In the case of the judgement, the loan amounted to 1.8 million euros, resulting in a gift of 785,000 euros to the brother. The amount of the interest advantage is also due to the fact that the loan had an unlimited term. Since only a tax-free allowance of 20,000 euros is granted between siblings, the taxable gift amounts to 765,000 euros and leads to a tax of 229,500 euros at a tax rate of 30 per cent. The plaintiff has filed an appeal with the Federal Fiscal Court (file no. BFH II R 20/22). Irrespective of this, loan agreements in the private sphere should be checked for their comparability with third-party loans in order to avoid gift tax in the future.

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