Recently, various reforms in Japan’s gift tax rules have been a major topic of discussion in newspapers and among expats who are more in-the-know. “Gift tax” (贈与税, zōyozei) is levied when one person gives money or goods to another person. It can cover many types of giving, for example one friend to another or sibling-to-sibling. However, one of the most common types of gift-giving is from older family members to younger ones; it is an efficient and simple way to transfer wealth from the older generation to the younger generation. It is possible to gain an exemption from this gift tax if a real estate purchase is involved.
Inheritance In Japan
Although inheritance is another vehicle that allows for transfer of wealth from the older generation to the younger one, one major disadvantage of inheritance is that the giver has to die first; how are children or grandchildren supposed to show their appreciation if the one who gave them something of value has now passed away? Another disadvantage of giving everything to one’s children or grandchildren through inheritance is the inheritance tax, which kicks in over ¥30,000,000 (+¥600,000 per survivor, e.g. spouse and/or children). For an elderly family member or relative hoping to pass on considerable inter-generational wealth, this would mean a great deal of that being stripped away by taxes.
Avoiding Inheritance Tax Using Gifts
Giving gifts is a way around that. A grandparent or parent can pass on money, goods, etc. to his or her child(ren) or grandchild(ren), enjoy the feeling of giving as well as their gratitude, and then, when he or she, hopefully at a ripe old age, makes life’s final journey, the taxation on the inheritance will be minimal or nonexistent.
Gift Tax: How It Works (rates, exemptions, classes, etc.)
The government of Japan does not want people to avoid paying their taxes, and so they implemented a gift tax in addition to an inheritance tax. The gift tax is progressive.
For relatively small gifts, there is an exemption of ¥1.1 million per year. If Mr. Satō gives his son ¥1 million yen to buy a used car, his son will pay no taxes on the gift at all. If Mr. Satō gives his daughter the ticket for a ¥1 million, all-expenses paid, first-class tour to Disney World in Orlando, Florida, this is also exempt. However, if he decides to give one of his children ¥10 million then, then the tax applies.
Until 2014, all gifts were taxed the same way, until reforms were made; after the reforms, there were two different classes: Regular (一般, ippan) and Special (特例, tokurei). In many cases, the new gift tax system is much more lenient than the old, allowing more deductions and lower percentages to be paid, especially for the Special category.
Do Foreign People Pay Gift Tax In Japan?
In some cases, yes, they do. Regulations have changed recently. Foreigners giving gifts within Japan generally need to pay it if the gift is sufficiently large to warrant it (in excess of ¥1,100,000, the exemption amount). If giving gifts outside of Japan, the gift may be subject to taxation using the following two conditions:
- The foreigner has or had a Table 2 visa (permanent resident, spouse or child of a Japanese national or permanent resident, or long-term resident). Those on work visas, student visas, etc. are exempt.
- The foreigner has lived in Japan for at least ten of the past 15 years. Therefore, theoretically, a foreigner’s gift given outside Japan could be taxed even if he had lived outside of Japan for say, 4 years, 11 months. If, for example, he moved back to Alabama and gave $10,000 to a friend in Alabama, Japan could levy taxes on that gift.
New rates that have been effective since 2014:
Example of the Gift Tax (Regular)
For example, imagine that Tarō and Haruto are nakayoshi (close friends). When they were in school, they used to ride their bikes together along the river everyday after school. And play guitars together. Now, for whatever reason, Tarō wants to give his friend Haruto a gift of ¥2,000,000:
¥2,000,000 gift – ¥1,100,000 exemption = ¥900,000 subject to taxation
¥900,000 subject to taxation × 10% = ¥90,000 that Haruto pays in gift tax
Example of the Gift Tax (Special)
Wealthy Ol’ Grandmother Asako wants to give ¥3,500,000 to her grandson, Riku, as an extremely generous graduation present. Not only is Riku a fine young man, he also just graduated from Tokyo University! How much will Riku need to pay in gift tax?
¥3,500,000 gift – ¥1,100,000 exemption = ¥2,400,000 subject to taxation
¥2,400,000 subject to taxation × 15% – ¥100,000 exemption = ¥260,000 that Riku pays in gift tax
How to Use Real Estate to Gain an Exemption from Gift Tax
A lot of people borrow money or receive money from their family members. Ordinarily, this would trigger the tax (above the exempted amount, ¥1,100,000). However, for real estate purchases, there is an exemption.
This exemption is currently ¥30,000,000 (though this number may change in the future). Here are two scenarios, one that does not use the exemption, and one that does:
Scenario 1: Giving ¥10,000,000 Without the Exemption for Real Estate
Wealthy Ol’ Grandmother Asako, who just loves her grandson Riku so very, very much, is back at it again, and wants to give him a ¥10,000,000 gift, because he is getting married, and she wants him and his wife to start off on stable financial footing (side note: she also wants great-grandkids). Here is how the gift tax is calculated:
¥10,000,000 gift – ¥1,100,000 exemption = ¥8,900,000 subject to the gift tax
¥8,900,000 subject to the gift tax × 30% special gift tax rate – ¥900,000 exemption = ¥1,770,000 that Riku pays in gift tax
Scenario 2: Giving ¥10,000,000 With the Exemption for Real Estate
This time, Wealthy Ol’ Grandmother Asako has read a book about personal finance and discovered a tax loophole that she hopes will significantly reduce the amount of gift tax. Will it work?
¥10,000,000 gift Specifically earmarked for a real estate purchase – ¥31,100,000 exemption if the gift is for buying real estate,
combined with the regular gift tax exemption = ¥0 subject to gift tax
Wealthy Ol’ Grandmother Asako rejoices. She has just found another way to further her dynastic ambitions!
Tax Exemption Terms And Conditions
The exemption is currently (in October 2019) ¥30,000,000 for housing that meets certain standards or ¥25,000,000 for general housing. It covers not only gifts of real estate (one person giving a house, a condominium, etc. to someone else), but also money specifically for purchasing property, or for refurbishment/repairs (reform, renovation, etc.). It is in addition to the standard ¥1,100,000 exemption that the gift tax already has.
If you have relatives that can give you money, real estate purchases can be tax efficient. Combined with the standard gift tax exemption, they can create an exemption of up to ¥31,100,000. This can save you literally millions of yen on gift tax.