Today, we will learn about how to write an IOU, IOU form, precautions when writing an IOU, and interest-free borrowing. If you purchase a house with financial support from your parents, you may be exposed to risks such as investigation of the source of funds later. At this time, if you receive support by receiving some as a gift and some through borrowing, that is, borrowing money from your parents, you can make a claim without any problems later.
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What is an IOU?
First, an IOU is a document written between a borrower and a lender, and can be classified as a type of contract. By writing an IOU according to the IOU, the relationship between the debtor and the creditor is clearly established, and the details of the debt amount and debt repayment plan have legal effect.
Please note that notarization and IOU have slightly different concepts. To put it simply, both IOU and notarization can hold the debtor (the person who borrowed money) legally responsible if he or she does not properly repay the debt, but notarization has a stronger effect than IOU.
Therefore, in general, in cases where borrowing occurs between family members, an IOU is often obtained, and in cases where borrowing occurs with other people or institutions, a notarization, which has a stronger effect, is often obtained.
How to write an IOU
Enter the personal information of the creditor (the person who lends the money) and the debtor (the person who borrows the money)
Personal information includes name, address, resident registration number, phone number, etc.
Enter the amount of debt (it doesn’t matter if you write it in Korean)
Enter repayment method and repayment date, including interest rate, interest rate, payment date, etc.
Penalty agreement, deadline and conditions stated in case repayment is not made
Signatures and seals of creditor and debtor
There is no legally prescribed form for writing an IOU. All of the required items above must be filled out and the signatures and seals of the most important creditor and debtor are required.
You can easily think of borrowing money using an IOU as the same as getting a loan from a bank.
Just as you pay interest every month when you take out a loan, the debtor who wrote the IOU must pay a certain amount of interest to the creditor every month. In the case of interest rates, the appropriate interest rate set by law, 4.6%, must be applied.
Of course, instead of paying interest, you can write the contract to repay a certain portion of the principal every year, which can be 3% to 5% of the principal.
Also, the borrowing period and borrowing amount are important. It must be written taking into account the debtor’s age, occupation, income, etc. You can simply think of how banks calculate the limit and interest rate based on the applicant’s occupation, income, and credit score when reviewing a loan.
Notes for debtors and creditors
Most cases of borrowing between parents and children occur when the children provide financial help in raising funds for a lease or purchasing a house.
The National Tax Service selects subjects for investigation by considering age, occupation, income, etc. and sends a notice to submit explanation materials. If you are a high-income earner and have financed a lease or purchased a house with only your own income without receiving help from your parents, you will be able to easily justify your case in the future.
However, if you actually received help from your parents, you must explain all details, such as whether you properly reported and paid gift tax according to the gift amount, and whether you paid interest on time if you borrowed money.
If you do not report and prepare properly out of fear, and then receive a notice to submit supporting documents and start preparing late, you may be subject to a large surcharge for gift tax, etc.
Additionally, creditors must report and pay interest income tax.
interest-free borrowing
There is a standard where interest does not have to be paid at an appropriate interest rate, and if the total annual interest amount is less than 10 million won, it is not subject to gift tax. Additionally, if you borrow without interest, but the interest converted to the appropriate interest rate on the principal is less than 10 million won, you are not subject to gift tax.
For example, if you borrow 50 million won, the monthly interest is approximately 173,000 won if the legal appropriate interest rate of 4.16% is applied. The total annual interest amount is approximately 2.7 million won, but in this case, it is not subject to gift tax.
Additionally, if you borrow at an interest rate lower than the appropriate interest rate and the difference between the interest paid at the appropriate rate is less than 10 million won, you are not subject to gift tax.
If the borrowing amount is approximately 217.39 million won, the total annual interest amount calculated at the appropriate interest rate is 10 million won.
In conclusion, this means that interest-free borrowing is possible if the borrowing amount is up to 217 million won.
Of course, this is just a standard for not having to pay interest, but repayment of the ‘principal’ must be made.
If the principal is repaid on a regular basis, interest is paid, so the creditor does not incur interest income tax and the debtor is also relieved of the burden of interest.
In other words, when borrowing between family members, it is best to borrow less than 217 million won and repay the principal in installments without interest.
In the case of gifts, you can save on gift tax by utilizing the gift tax exemption limit, which can be found in the article on gift tax exemption limit.
IOU form
The Korea Legal Aid Corporation’s Solo Litigation Legal Support Center provides IOU forms.
Search for ‘Money Borrowing Agreement’ and download and fill out the form.
Of course, as I mentioned above when telling you how to write an IOU, there is no set legal form, so you can fill it out by filling out the required items.
In this way, we learned about how to write an IOU, precautions when borrowing, interest-free borrowing method, and IOU form. I hope you found the content helpful.
How to write an IOU?
Enter required information such as personal information of creditor and debtor, amount of debt, repayment plan, signature, and seal.
interest-free borrowing
If the borrowed amount is less than KRW 217 million, interest-free borrowing is possible.