As the loan is contractual, presumably consideration was originally given e.g. interest but which is past. In principle it is open to the parties to agree change the terms, either orally or in writing, but if this is gratuitous there would be no new consideration rendering the agreement unenforceable contractually . Leaving tax aside, this is an issue for the parties themselves e.g. could the borrower enforce an agreement by the lender no longer to charge interest? In theory nominal consideration, say of £1, could overcome this. Consideration does not have to be sufficient.
The point is that such an agreement (best in writing for evidence) would not require a lawyer to document it. A contractually valid agreement would have to be respected by HMRC. The parties may not be too concerned about validity; even trustees may not fear a later attack by a beneficiary and they may have proper power to lend interest-free. But HMRC may challenge the tax effect of a simple agreement between taxpayers which is not contractually valid. A deed, whose formalities have now been reduced to the vestigial, and can be written on a bus ticket, must be drafted by a lawyer who can conduct the particular reserved activity.
HMRC can and do challenge the tax efficacy of gratuitous transactions (not done for “consideration”) which lay clients in particular often fail to realise can be cured by a deed. It can be cured after the event, for all purposes and even retrospectively as between the parties, but not retrospectively as to the operative tax date. So forgiveness of interest by deed must become effective prospectively before it is received (income tax) or before its due and payable date (IHT) or HMRC can tax it regardless and notwithstanding that, as between the parties, the deed may be fully effective to change their mutual rights and obligations.
The tangential connection with DOVs is that a deed is not strictly necessary for IHT/CGT read-back treatment but still needs to be enforceable as between parties (and must deal with estate income before it arises if the person otherwise entitled is to be deprived of it but avoid tax on it, as no income tax read-back). The problem with DOVs is that any consideration, even for a deed, other than another estate interest, nullifies that IHT/CGT treatment without altering the strict legal position as between the parties as per their bargain.
As it is the business and delight of HMRC to frustrate taxpayers’ intentions, and make advisers write letters to their insurers, they are very adept at spotting whether or not consideration is legally present in any relevant tax context and the tax consequences that follow. Unless, possibly, the latter are not in their favour (see Nelson of old). Unfortunately such issues often arise before the adviser is instructed, limiting room for action but not diminishing the need to attenuate client expectations before HMRC do so.