Private loan - what should be considered?

Hello everyone,

we are still eagerly waiting to receive a building plot from our municipality. Unfortunately, the allocation was delayed by a good 2 years and will begin next month. If we are then awarded a plot, we want to start building asap.

Now the following situation has arisen in our family. An uncle (childless) has offered to support us in financing our building project and to give us a private loan at 1% p.a.

Are there any special considerations to keep in mind here? Is it allowed to grant private loans that are well below the market interest rate?

How does it behave with the loan in the event of the uncle’s death? If heirs (siblings or other nephews/nieces) appear here, does the loan have to be paid to them, or can it be stipulated that the claim expires? Or is the remainder converted into a gift that must be taxed?

In Germany, there is freedom of contract. Thus, you can conclude contracts with your uncle. Of course, such a loan agreement becomes part of the [estate]. How this is then handled in the event of inheritance should be advised by a notary.

In my opinion, siblings as well as nieces and nephews are heirs of the 2nd order. They have no compulsory portion claim. If you are considered according to the will or inheritance order, inheritance tax must be paid in any case. The question is then what do you want to pay the tax with?

I would stay away from something like that. There are other relatives, and it will not be funny in the future.

The tax office applies a market interest rate (I believe 5.5%). Anything you pay less in interest is considered a gift. If the interest savings exceed the tax exemption amount, you pay gift tax.

We once calculated it and I think determined something like a 100k loan interest-free = 20k gift.

Also, you should keep in mind that the uncle might realize that he could now get over 3% risk-free for a fixed deposit. He might then withdraw his offer or adjust his expectations regarding the interest rate. I would only do it if you don’t see the uncle all the time. He will scrutinize every larger expense on your part critically; after all, you could have repaid the (cheap) loan instead. Unfortunately, I have often witnessed this in my circle of friends, no matter what intentions and agreements existed beforehand. Private individuals unfortunately behave very unprofessionally when it comes to money or business.

Also, you should consider that the uncle might realize by now that he could get over 3% risk-free for fixed deposits. He might then withdraw his offer or revise his expectations regarding the interest rate. I would only do it if you don't see the uncle all the time. He will scrutinize every larger expense on your part; after all, you could have used the money to repay the (cheap) loan instead. Unfortunately, I have often witnessed this in my circle of friends, regardless of prior intentions and agreements. Unfortunately, private individuals behave very unprofessionally when it comes to money or business.

I can understand your concerns. But the uncle has often granted private loans to nieces/nephews at low rates to support them, for example with their studies or starting a business. The investment was not the main focus; he has many other "strings to his bow," so I would be surprised by such behavior. He is also considering giving part of his assets – including his house – to someone who may need it more during his lifetime. So it is more about supporting the nieces/nephews and bequeathing "with a warm hand."