"You pay no gift tax up to ¥1.1 million each year" is true, but if you do it wrong you can be taxed on the lump sum, or the tax-saving effect can vanish because the gifts are added back at inheritance. Furthermore, the 2024 reform newly created a ¥1.1 million annual basic deduction for settlement-at-inheritance taxation as well, greatly changing how you choose between it and annual gift-giving. This article organizes the correct way to use the ¥1.1 million exclusion, the pitfalls of periodic gifts and nominal deposits, the 7-year add-back rule, the large purpose-specific tax-free allowances, and finally which to choose: annual taxation or settlement-at-inheritance taxation.
The basic deduction under annual taxation (¥1.1 million a year)
The ¥1.1 million is judged not "per giver," but by the total received in one year by the recipient (donee). If you receive from several people, the amounts are combined[National Tax Agency No.4402].
If you receive a total of ¥2 million from your grandfather and parents: ¥2 million − ¥1.1 million = ¥900,000. At the 10% rate for a gift received by a person aged 18 or over from a lineal ascendant (special gift property), this is a gift tax of ¥90,000 (a filing is required).
*There are two kinds of gift tax rate: the "special rate" for a person aged 18 or over receiving from parents or grandparents, and the "general rate" for everything else.
Pitfall 1: periodic gifts and nominal deposits
If you keep giving the same amount at the same time every year, it may be regarded as "a promise from the start to hand over a set sum in installments (a periodic gift)," and the total amount can be taxed all at once. Also, an account in a child's name that is managed by the parent may be deemed a "nominal deposit," judged as a gift that was never completed = still the parent's property.
Measures to avoid being called a periodic gift or a nominal deposit
① Vary the amount and timing each year
② Draw up a gift contract every year (to show that each is a one-off gift)
③ Transfer into an account the recipient can manage and use themselves (the passbook and seal also managed by the recipient)
④ Leave a record via bank transfer (avoid handing over cash)
Pitfall 2: gifts within 7 years before inheritance are added back (2024 reform)
Under annual taxation, gifts made in a certain period before inheritance to a person who receives property in the inheritance are added to the inherited property. The reform extended this period from 3 years to 7 years. For the extended years 4 through 7, there is an easing whereby up to a total of ¥1 million is not added back.
However, there is a transitional measure: it does not jump straight to 7 years, but the period lengthens gradually from gifts made on or after 2024 (the full 7-year add-back applies from inheritances on or after 2031). In any case, the earlier you start gifting, the more advantageous.
*The add-back targets gifts to "a person who acquired property in the inheritance." For example, a gift to a grandchild who is not an heir is in principle outside this add-back (except for receipt of life insurance proceeds, etc.).
Annual taxation vs. settlement-at-inheritance taxation (the choice changed in 2024)
Settlement-at-inheritance taxation is a system that lets you gift up to a cumulative ¥25 million without gift tax and settle it all at once at inheritance. From 2024, a ¥1.1 million annual basic deduction was newly created, greatly improving its usability[National Tax Agency No.4103].
| Item | Annual taxation | Settlement-at-inheritance taxation |
|---|---|---|
| Annual tax-free allowance | ¥1.1 million | ¥1.1 million (newly created from 2024) |
| Special deduction | — | Cumulative ¥25 million (excess taxed at a flat 20%) |
| Inheritance add-back of gifts of ¥1.1 million a year or less | The 7 years before inheritance are added back | Not added back (the basic-deduction portion of settlement taxation) |
| Election | Default setting | A notification is required; once chosen you cannot return to annual taxation |
If you can gift steadily over many years (the giver is young and healthy), annual taxation. If the giver is elderly and inheritance is near, if you want to move a sizeable amount of assets early, or if you want to reliably hand over ¥1.1 million each year without inheritance add-back, settlement-at-inheritance taxation tends to be advantageous. Since settlement taxation cannot be reversed to annual taxation once chosen, decide carefully.
Large purpose-specific tax-free allowances
Up to ¥10 million
Funds from parents or grandparents for acquiring, newly building, or extending/renovating a home. Tax-free up to ¥10 million for energy-efficient and similar housing, and up to ¥5 million for ordinary housing (subject to an application deadline and requirements on income, floor area, etc.; confirm the latest)[National Tax Agency No.4508].
Up to ¥15 million
A lump-sum gift of education funds to a child or grandchild under 30 (up to ¥5 million for uses other than schools). A dedicated account at a financial institution is required. There is an application deadline. Any unused remainder can become taxable.
Up to ¥10 million
Marriage and child-rearing funds to a child or grandchild aged 18 to under 50 (up to ¥3 million for marriage-related uses). An application deadline is set, and confirm the latest as it may end or be revised.
These special provisions for lump-sum gifts have application deadlines and may be revised or ended. Also, for education and marriage/child-rearing funds, any remaining amount not used up can become subject to gift tax or be included in the inherited property. Before using them, confirm the requirements in the latest National Tax Agency materials.
FAQ
Is the ¥1.1 million judged on the giver's side or the receiver's side?
It is judged by the total received in one year by one recipient (donee). If you receive from several people, the amounts are combined, and gift tax applies to the portion exceeding ¥1.1 million.
If I give ¥1.1 million each year, is it always tax-free?
If the amount and timing are fixed and it is regarded as a "promise of installments," it may be taxed all at once as a periodic gift. You need steps that show each is a one-off gift, such as drawing up a gift contract every year and transferring into an account the recipient manages themselves.
How far back are gifts before inheritance added back?
Under annual taxation, 7 years before inheritance (extended in stages by a transitional measure). For the extended years 4 through 7, up to a total of ¥1 million is not added back. The ¥1.1 million annual basic-deduction portion of settlement-at-inheritance taxation is not added back.
Which is better, annual taxation or settlement-at-inheritance taxation?
If you can gift steadily over a long period, annual taxation; if inheritance is near and you want to reliably hand over ¥1.1 million without inheritance add-back, settlement taxation tends to be advantageous. Note that settlement taxation cannot be reversed to annual taxation once chosen.
Summary
Reference links (sources)
This article is based on materials from the following public bodies (neutral, primary sources). Tax-free allowances and special provisions are revised, so always confirm the latest content before acting.
- National Tax Agency No.4402 When gift tax applies (in Japanese)
- National Tax Agency No.4408 Calculation and rates of gift tax (annual taxation) (in Japanese)
- National Tax Agency No.4103 Electing settlement-at-inheritance taxation (in Japanese)
- National Tax Agency No.4508 Tax exemption for funds for housing acquisition etc. gifted by a lineal ascendant (in Japanese)
- National Tax Agency No.4161 Addition of gifted property and tax credit (add-back of lifetime gifts under annual taxation) (in Japanese)
*This article is general information, not tax advice. For designing lifetime gifts or choosing a system, please consult a tax office or a tax accountant.