Today, we will learn how to write an IOU, how to download the form, and the legal effects. Recently, as housing prices have risen rapidly, there are cases where parents and children are financing the cost of purchasing a home through financial transactions. In this case, you must fill out the IOU in the proper form and pay the appropriate interest to avoid problems during future tax audits. We will now explain this in detail.
<Table of Contents>
1. Download IOU form
2. How to write an IOU, legal effect
3. How to calculate appropriate interest rate
※Good article to read together
How to write a housing financing plan, supporting documents
1. Download IOU form
IOU forms vary. You can download it from Saramin, and many blogs also provide forms. I will introduce how to download the IOU form provided by the Seoul Central District Court.
① Visit the Seoul Central District Court site using the link below
Legal culture lecture | Seoul Central District Court
seoul.scourt.go.kr
② Search for ‘IOU’
How to download the Seoul District Court IOU form
How to download an IOU
③ Download form file
How to download the Seoul District Court IOU form
How to download an IOU
Below is a screenshot of the IOU form. The writing method and explanation are detailed.
Seoul District Court IOU Form
IOU form
2. How to write an IOU, legal effect
National Tax Service regulations regarding financial transactions between family members
National Tax Service regulations regarding financial transactions between family members
In order to properly write an IOU, you can write it as if you are a complete stranger rather than a family member. If you think about what things should be written on an IOU when lending money to someone else, this can be judged to be a legitimate financial transaction.
① The time of writing is clear.
The IOU must clearly state when it was created. If you lend money and then use it later when you are subject to a tax audit, this cannot be considered a legitimate IOU.
For this purpose, it is recommended to fill out an IOU and use a post office certificate or notarization. If this is difficult, it can also be done through recorded email or text. However, if possible, please send the certificate of contents to the post office. The method is to fill out three copies of the contents certification and go to the post office to request verification of contents.
How to use the proof of contents of the IOU
How to use post office content certification
② Debt repayment conditions
The appropriate interest rate, timing of interest payment, and timing of principal repayment must be clear. If a child lends money or does so without interest even though he or she does not have financial ability, the tax authorities consider this to be a gift. This is something that must be taken into consideration, considering that it is not a transaction between parents and children, but rather a third party.
③ Thorough repayment of interest and principal
Children who borrow money must repay the interest and principal on time. There must be bank transaction details at the time the IOU was written. In addition, once the tax authorities conduct an investigation, even if they recognize it as a loan of funds, they follow up until the day the child repays the money to his or her parents.
3. How to calculate appropriate interest rate
In financial transactions between parents and children, the appropriate interest rate that is not considered a gift is specified in the law. This is stated in Paragraph 4 of Article 41 of the Inheritance and Gift Tax Act.
Article 41 of the Inheritance and Gift Tax Act
Inheritance and Gift Tax Act Interest Rate
If you look at the contents, the appropriate interest rate is 4.6%. However, this is excluded if the interest amount is less than 10 million won, which is ‘less than the standard amount prescribed by Presidential Decree.’ Let me explain this with an example.
Appropriate interest rate for financial transactions between parents and children
example
For example, if a parent lends their child 300 million won and promises to repay it after one year, the appropriate interest rate is 4.6% per year. However, instead of receiving a portion of the interest, I decided to only receive 1.6%. Then, 9 million won, or 3% per year, will be a gift from the parents to their children. However, since the value of the gifted property is less than 10 million won, it is not subject to gift tax.
Therefore, you do not have to repay interest up to 10 million won per year. Therefore, you can lend up to 217 million won to your children without receiving interest.