Lending money to family or friends
Lending money to children, family and friends, known as ‘private loans’, is common practice. It can be an effective way to provide support, but what things should you consider before lending your money? And what about taxes? Have a look at our tips in this article.
This article uses the term ‘lender’ to refer to the person giving the loan and ‘borrower’ as the person borrowing the money.
What is a private loan?
A private loan is a loan given by an individual without any involvement from a bank or other loan provider. The arrangements that underlie these types of loans generally aren’t set out in an official notarised agreement. A private loan could be a loan between two friends, or a grandparent lending money to a grandchild. If the loan is between two family members, it’s often called a ‘family loan’.
If you intend to issue many loans or lend money to people other than your family and friends, there may be other aspects you need to consider that aren’t discussed in this article. For instance, you may need a licence to issue these loans. It’s therefore wise to seek advice from a financial adviser.
This article assumes that you wish to lend money to friends or family.
Lending money to your children
If you’re a parent and considering lending money to your child to finance a big purchase like a new home or car, be sure to make clear agreements. And remember: the loan may have an impact on both your own and your child’s income tax return. See point 5 onwards of this article for more information.
1. Is the loan in line with your finances?
Lending money has no impact on your assets – instead, part of your assets are ‘locked’ into the loan. This means you won’t be able to access them, which is something you’ll need to factor into your financial planning.
If you’re lending large amounts of money, it’s particularly important to consult with an adviser who can assess whether the loan is affordable and sensible for the lender. After all, family dynamics make it tricky to ‘demand compliance’ with agreements, as a financial institution might. While you can’t fully control what happens in the future, it’s always a good idea to make sure the loan is in line with your finances.
2. Will the loan influence your relationship with the borrower?
Be aware that lending money adds a financial aspect to your relationship with the borrower. What happens if the borrower, who could be your child, forgets to pay or ends up in financial difficulty? These events can put a strain on your relationship. If you don’t want to loan money, you could consider making a gift. But again, you should consider how this could influence your relationship.
3. Will the borrower pay interest?
Another aspect to consider is interest on the loan. If you charge less interest than a bank or no interest at all, the Dutch Tax and Customs Administration may consider your loan as a gift. Gifts above a certain threshold are subject to gift tax. You could also consider gifting your child a set amount of money each year up to the tax-free threshold, so that your child can pay back the interest, the loan or both without owing gift tax.
Some people think they should charge as much interest as possible on a loan for a home, as mortgage interest is deductible. However, an excessively high interest rate could turn the loan into a gift from the borrower to the lender. In that case, part of the interest would no longer be deductible. This begs the question: what interest should you charge? A fair interest rate is usually the rate that a bank would charge. Again, you should seek advice from a tax adviser.
4. Lending money to fund a home purchase
If you’re lending your child money for a home, you could consider setting up a first mortgage lien through your notary. This means you have a legal claim to the property if the lender can’t repay the loan.
Another alternative is what’s known as a ‘positive/negative mortgage statement’ in a personal loan agreement. This means that the child pledges to give you a mortgage lien on the property and refrain from raising any other mortgages on the property. This option offers less security than a first mortgage lien as of the effective date of the loan.
5. How does the loan affect the lender’s income tax return?
If you issue the loan from your private assets (and not from a limited company, for instance), the loan will be considered an asset in box 3 (taxable income from savings and investments). In 2025, these kinds of loans are considered ‘other assets’. This means that you are assumed to earn a 5.88% return on the loan, on which you pay 36% tax. This is generally around 2.1% tax on the loan amount.
Your tax burden increases if the interest earned is below 5.88%. To illustrate: if the interest rate is 2.1%, the tax burden will be 100%. This is because the tax system is based on expected percentages. The Dutch Tax and Customs administration will soon allow you to state whether the actual return is lower than the assumed return. Under new legislation, it intends to tax actual return from 2028.
6. How does the loan affect the borrower’s income tax return?
The tax the borrower pays depends on how the money is used. For instance, if the money is used to purchase a car, the loan will fall into box 3. If the money is used to purchase a home, it will be in box 1.
If the loan falls into box 3, the borrower may deduct an assumed interest rate of around 2.6% from their box 3 income in 2025. While this could lower the borrower’s tax bill, it’s less than the return of 5.88% that the lender is assumed to earn. Under the new system, the interest effectively paid will be used to calculate the actual return.
A loan for a main residence may entitle the borrower to interest deduction. In 2025, the maximum deduction rate is 37.48%.
If your child uses the money for their business, the tax consequences will differ depending on the situation. It’s therefore wise to seek advice from a tax adviser.
7. Lending money from a limited company
If you’re a shareholder of a limited company, you may have the option of lending money from your limited company. If you do, make sure the money is lent on business terms and is aligned with your company’s purpose.
This is because lending money from your limited company counts as a business investment: the limited company will earn interest and owe corporate income tax on it. The lowest rate of corporate income tax in 2025 is 19%. If you pay out the remainder as a dividend, you will pay at least 24.5% tax in box 2 (tax on substantial interests). In total, your tax burden would be approximately 39%.
This tax burden is higher than the rate of mortgage interest deduction for your child, if the loan is used to purchase a home. The rate at which you can deduct interest in 2025 is capped at 37.48%. Again, it’s wise to seek advice on this.
In summary
As you’ve read, there are many things to consider when lending money. What matters to us is that you’re able to make well-informed decisions. We hope this article has been informative.
