How to write an IOU, form and precautions
Today, we will learn about how to write an IOU and the form that proves a financial transaction.
<Table of Contents>
1. How to download the free IOU form
2. How to properly use an IOU and precautions
3. How to calculate appropriate interest rate
Recently, apartment prices in the metropolitan area have risen rapidly, and there are cases where parents and children raise funds through financial transactions. In fact, legally, if a child borrows money from his or her parents, it is ‘presumed’ to be a gift. However, even if it is a transaction between family members, an exception is recognized if it can be proven that the funds were transacted at an appropriate interest rate. However, if you are careful, the National Tax Service may judge it as an illegal gift and conduct a tax investigation. At this time, the representative document used to prove that you borrowed money from your parents is the IOU!
In this post, we will learn about this IOU form and how to properly fill out the IOU.
1. How to download the free IOU form
There are many different forms of IOU. 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
seoul.scourt.go.kr/contract/new/DocListAction.work
Legal culture lecture | Seoul Central District Court
seoul.scourt.go.kr
② Search for ‘IOU’
③ Download form file
Below is a screenshot of the IOU form. The writing method and explanation are detailed.
IOU form
2. How to properly use an IOU and precautions
In order to properly write an IOU, it is easier to write it as if you are a complete stranger rather than a family member. When lending money to someone else, what should I write on the IOU? If you think about it this way, you can see this as 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, right?
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 certificate of contents, go to the post office, and send the certificate of contents.
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.
Considering that this is not a transaction between parents and children, but rather a third party, this is definitely something to consider, right?
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.
If you look at the contents, the appropriate interest rate is 4.6%. However, it 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.
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.