Couple faced W190m in gift and inheritance taxes — then got it all back

Lee Woori, 72, lost his wife suddenly last year. When a notice recently arrived from the tax office, he could hardly believe what he was reading. He had thought he had already filed and paid all his inheritance taxes — yet here was a demand for an additional 175.7 million won. Inside the same envelope was a gift tax notice for 16.76 million won, the first he had ever received.

The source of the problem was an apartment the couple had purchased six years earlier, registering it in both their names with a 50-50 ownership split. The apartment had been bought for 1.4 billion won and had since risen in value to 2.5 billion won. Although the property was clearly held jointly, the tax office treated even Lee's 50 percent share as an asset his wife had gifted him during her lifetime. In an instant, a home the couple had built together became, in the eyes of the tax authorities, inherited property.

The couple had no children, and Lee's parents-in-law had already passed away, leaving him as the sole heir. In addition to the jointly owned apartment, his wife left behind 2 billion won in assets, including retirement pay.

Lee had never imagined he would face a gift tax bill. He was stunned to learn he owed not only a penalty surcharge for failing to file a gift tax return but also a large additional inheritance tax. After his wife's death, he had reported her 50 percent share of the apartment — valued at 1.25 billion won at the time of inheritance — along with her other 2 billion won in assets, and had paid 4.37 million won in inheritance tax. He had considered the matter closed. Instead, the tax office handed him a bill for more than 192 million won.

Feeling wronged, Lee sought advice from tax specialist "Smart Hongtax" on how to challenge the assessment.

A: Tax law looks not at the name on the title deed but at whose money actually paid for the property.

You and your wife entered the pre-sale contract on a 50-50 basis and registered the title accordingly. However, every payment — the full purchase price — came out of your wife's bank account. She was also the sole borrower on the interim construction loan, and all principal and interest repayments were made from her account alone. At no point in the entire acquisition process did your account appear.

When that is the case, the tax office concludes that your wife paid for your 50 percent share on your behalf — in other words, a gift. A gift does not have to be the transfer of real estate itself. Paying someone else's real estate purchase price on their behalf is treated exactly the same way under tax law.

A: The gifted asset is valued at half the purchase price of 1.4 billion won — that is, 700 million won. Subtracting the 600 million won spousal gift deduction leaves a tax base of 100 million won. At a 10 percent rate, the calculated tax comes to 10 million won.

The trouble starts there. Because no gift tax return was filed at the time, you receive no 3 percent filing credit. Instead, a 20 percent non-filing penalty of 2 million won applies, along with a late-payment surcharge of 4.76 million won (0.022 percent per day from Feb. 15, 2022). The final gift tax bill comes to 16.76 million won.

Put another way, if you had simply filed a gift tax return six years ago, the total tax would have stopped at 9.7 million won. Failing to file cost you more than 7 million won in additional charges.

A: In principle, inheritance tax applies to the assets a deceased person held at the time of death. However, because people were avoiding inheritance tax by transferring assets in advance, the tax code introduced a safeguard.

Gifts made to an heir within 10 years before death, and gifts made to non-heirs within five years before death, are all added back into the taxable estate. The amount added is valued at the market price on the date of the gift, not at the time of death. Any gift tax already paid is then credited against the inheritance tax liability.

In your case, your 50 percent share of the apartment — valued at 700 million won — was determined to have been gifted by your wife six years ago. Because that falls within the 10-year window, it is treated as a pre-death gift and folded into the taxable estate.

A: It looks that way, but the two figures actually refer to different ownership shares.

Your wife's 50 percent share is the inherited portion. It is valued at 1.25 billion won, the market price at the time of inheritance.

Your 50 percent share is the pre-death gift. It is valued at 700 million won, the market price on the date of the gift six years ago.

Although it is the same apartment, one half is treated as inheritance and the other as a gift, each calculated at a different point in time. No single share is taxed twice.

A: Let us walk through the tax office's calculation step by step.

Adding the pre-death gift of 700 million won to the originally reported estate of 3.25 billion won gives a combined figure of 3.95 billion won. Subtracting the inheritance deductions — a basic deduction of 200 million won, a spousal inheritance deduction of 3 billion won, and funeral expenses of 5 million won — leaves a tax base of 745 million won, a sharp jump from the 45 million won originally reported.

Because the tax base now exceeds 500 million won, the applicable rate rises from 10 percent to 30 percent. Applying 30 percent to 745 million won and subtracting the progressive deduction of 60 million won yields a calculated tax of 163.5 million won. Deducting the 10 million won gift tax credit brings that down to 153.5 million won, and a 3 percent filing credit of about 296,000 won is then subtracted. However, a 10 percent underreporting penalty of 14.9 million won and a late-payment surcharge of 11.96 million won are also assessed, bringing the final inheritance tax to approximately 180.06 million won.

Compared with the 4.37 million won already paid, the additional inheritance tax comes to 175.7 million won. Adding the gift tax of 16.76 million won, the total additional tax bill Lee faced exceeded 192.46 million won.

A: It is a common point of confusion, but the short answer is no — you are not taxed twice on the same amount.

The 10 million won in calculated gift tax was already deducted as a gift tax credit when computing the inheritance tax — that is the 10 million won subtracted from the 163.5 million won figure above. Of the 16.76 million won shown on the gift tax notice, the only amount you are actually paying on top of everything else is the 6.76 million won in penalty surcharges.

The reason the overall tax burden increased so sharply is not double taxation but the tax bracket effect. Had the 700 million won not been reclassified as a pre-death gift, the inheritance tax base would have remained at 45 million won, subject to a 10 percent rate. Once the gift is added back, the base rises to 745 million won, pushing the rate up to 30 percent. The rule is designed precisely to prevent people from reducing their tax bracket by making incremental gifts in advance.

A: You have grounds to contest the assessment — but the clock is already running, and that is the first thing you need to know.

If you had received a pre-assessment notice after the tax audit, you could have filed a pre-assessment review request before the formal notice was issued. Since you have already received the tax notice, however, you must now go through the formal tax objection process. You may choose one of four routes: filing an objection with the tax office, submitting a review request to the commissioner of the National Tax Service, filing a petition with the Tax Tribunal, or submitting a review request to the Board of Audit and Inspection.

The deadline is 90 days from the date you became aware of the disposition — that is, the date you received the notice. Meeting that deadline is critical.

A: There are two things you need to prove. First, that you personally covered the family's living expenses. Second, that you had the financial means to acquire your 50 percent share of the apartment on your own.

Assertions alone are not enough — you need objective documentation. Use income certificates for both you and your wife to show that you had sufficient earnings to fund a 50 percent ownership stake, and use credit card statements and bank transaction records to demonstrate that most of the household spending came from your accounts. Rather than submitting the raw documents, organizing the data in a spreadsheet by year and category — so that the picture is clear at a glance — will work strongly in your favor.

Court precedent supports this kind of argument broadly. The Supreme Court has held that bank transfers between spouses can reflect many things — shared living arrangements, delegated financial management, payment of household expenses — and cannot automatically be presumed to constitute a gift. The court has also ruled that a person with a steady occupation and financial means cannot be deemed to have received funds as a gift from a spouse simply because the precise source of part of a real estate purchase price cannot be pinpointed.

In your case, you were a salaried worker for 30 years with ample financial capacity, and you can document that you simply entrusted your wife with managing the family's money.

After the consultation, Lee filed a petition with the Tax Tribunal. After waiting nearly a year, he received a ruling canceling the entire additional inheritance and gift tax assessment. His grievance was vindicated — but not without cost. To stop the penalty surcharges from accumulating during the appeal period, he had to pay the taxes upfront and wait to be refunded, and he spent a year in uncertainty not knowing how the case would end.

A: Concern about gift tax on spousal transfers has led more people to manage their finances entirely apart. In practice, though, splitting every household expense down the middle is virtually impossible. As noted earlier, not every bank transfer between spouses is treated as a gift, so there is no need to be overly alarmed.

The real risk lies elsewhere. The moment that matters is not day-to-day transfers but the acquisition of a major asset such as real estate. At that point, you must have a clear record of where the funds came from.

A: There are three rules to follow.

First, pay each installment of the purchase price from each person's own account in proportion to their ownership share wherever possible. Second, even for jointly owned real estate, the mortgage is typically taken out in one person's name, meaning all principal and interest payments leave that person's account. If you hold the property 50-50, transfer half the monthly repayment into the borrowing spouse's account each month and keep a record of it. Third, when making a transfer, leave a note explaining its purpose; if the money is a loan rather than a gift, draw up a written loan agreement and maintain a financial record showing it was repaid as agreed.

Finally, if a gift between spouses is necessary, file a gift tax return even if the amount falls within the 600 million won spousal deduction and the tax owed is zero. The filing itself becomes the most reliable documentation of the source of funds.

[By Jung Ho-won / Hong Ja-young, tax consulting team, WM Business Strategy Division, Woori Bank]