When is borrowing and lending treated as a gift?

When you borrow money, it may be treated as a gift if the circumstances give reason to believe that you never were expected to pay it back.

Lenders are not required to collect interest on a loan. This means that the mere fact that no interest is paid does not turn a loan into a gift. However, there must be a plan for how the loan is to be repaid, and you must be able to prove that you actually made some repayments to the lender. The loan amount and the repayment plan must be realistic – i.e. in correct proportion to the borrower’s financial standing. For purposes of gift taxation, a loan may be deemed a gift if the lender and the borrower agree that the latter will receive tax-exempt gifts in order to repay the loan with them (for example, receive gifts of just below €5,000 with 3-year intervals).

Children under 18 are normally considered to be unable to pay back loans. If a child has no income that would cover the repayments, a gift from parents is regarded as a gift subject to gift tax.