How to give money to your child to buy a property

Buying a property can cost a fortune. Not only do you have to pay for the property, there are also taxes and notary fees on top. Bear in mind that a mortgage makes this easier, but it doesn’t cover all the costs, as banks usually only grant 80% of the property’s value. Many parents wonder whether they can help their child financially in order to buy a house. Here’s a rundown of everything you need to know in this article.

H2: Can you give your child money to buy a property?

If you’re wondering whether you can give money to your child to buy a property, the answer is yes. Families commonly lend each other money or give gifts inter vivos, however you need to be careful, as they entail certain tax obligations that you’ll need to be aware of beforehand.

As we stated earlier, buying a house is a big financial outlay. It isn’t enough to save up to pay the earnest-money deposit or make the down payment; you must also meet the requirements before being awarded a mortgage, and have enough money for the other related costs. 

You’ll need to pay for the public deed, taxes (VAT or ITP) and notary fees. What’s more, supply contracts need to be taken out for the property (electricity, heading, water). It is possible for parents to give money to a child to buy a property, and there are two ways to go about this: Look into it beforehand to avoid any surprise taxes.

Gift: How much money can my parents give me?

The first way is a parent-to-child gift to buy their primary residence. This is the most common way. The parent-to-child gift to buy a house is also included in civil contracts and, like all contracts, it’s also subject to rights and obligations. In this case, this money is given without it having to be paid back further down the line; in other words, it’s a gift. 

Nevertheless, although a child might be given money to buy a house and they aren’t expected to pay the money back in the future, the tax obligations that the gift entails need to be complied with. The corresponding taxes (gift tax), that are managed by the Autonomous Community in which the money, in the form of a gift, is given. We’ve already mentioned that the gift is a contract and must therefore also be made official.

In order to make the document official for all tax-related intents and purposes, it must be executed before a notary public.

How much money can you give a child without having to pay taxes?

There is no minimum amount, but it’s important to know that, provided this gift has been made official, (which is the right thing to do to avoid tax complications), a tax must be paid. This tax is subject to a tax rate applied to the taxable base, in other words, to the amount gifted. The percentage of the tax rate ranges from 7.65% to 34%. 

Once it is applied, the tax payable is calculated and stipulated according to a multiplier coefficient. This coefficient depends on the group to which the donee (the recipient of the gift) belongs and is determined according to age and degree of kinship (parent to child or vice versa). The tax rate ranges from 1 to 2.4%.

Although the figures may seem high, don’t worry, as there are different discounts and reductions available. 

How to give money to a child without declaring it

Can you give money to a child to buy a house without declaring it? You should be aware that the gift is liable for tax, but you can benefit from a number of discounts, meaning you don’t have to pay tax. It all comes down to where the gift is made. As we’ve already mentioned, the tax is of an autonomous nature and it is the communities that are responsible for managing it. 

Many can avail of reductions and discounts, such as in Madrid, where reductions of up to 100% aren’t unheard of. Madrid’s case is rather straightforward: in order to benefit from the reductions, the gift needs to be formalised before a notary and the source of funds must be accredited when the gift is made in cash. 

Furthermore, to get up to a 100% reduction, no more than €250,000 can be handed over and the amount handed over must go towards buying a home. In addition, the property must be purchased within one year. Other autonomous regions that also offer significant tax reductions for gifts between parents and children are Andalusia, Cantabria, Aragon, Galicia and Murcia.

In the case of La Rioja, Catalonia, the Balearic Islands and Castile-La Mancha, allowances for gifts are subject to the degree of kinship between the parties and the amount given. This entire process also applies the other way around.

H2: How is a parent-to-child home loan taxed?

A loan can be given instead of a gift; in other words, the money is given with a view to the child paying pack his/her parent(s) the amount lent to buy their home. Just like the gift, the loan is also subject to tax. This is known as a family loan (children can also lend to their parents) and is characterised by the following features:

• No interest charged. 
• Grace periods.
• Flexible repayment terms.

Just like the gift, the loan is a contract and is also subject to rights and obligations between the parties and the public administration. The contract must be formalised and this document should set forth:

• The amount given by way of a loan.
• The interest paid on money borrowed or the absence of such interest. 
• Repayment deadlines and agreed instalments. 
• Possible repayment extensions and early repayments. 
• Guarantees. In other words, steps to be followed if the loan is not repaid. 

Just like a gift, a parent-child loan is subject to tax obligations. Nevertheless, in this case, they’re only borne by the borrower, in other words the person who receives the money. From the date on which the contract is signed, the Inland Revenue grants a period of 30 days to file the tax return, as they are deemed to be onerous transfers of property. The borrower must file the Tax on Property Conveyances and Documented Legal Acts but, as they are tax-exempt, there’s no need to pay anything to the Inland Revenue. 

In other words, the tax return must be submitted by filling in form 600, accompanied by a copy of the loan contract. However, no amount needs to be paid. The loan must also be declared in the Income Tax Return.