[PB Notebook] Shifting Trends in the Real Estate Inheritance and Gift Market Amid Policy Turbulence

Lee Inwook, Wealth Manager at Kyobo Life Financial Planning Center

Significant changes were anticipated in this year's real estate market, but the most closely watched inheritance and gift tax reform proposal ultimately failed to pass the National Assembly. The Ministry of Economy and Finance's proposals to lower the top inheritance and gift tax rate (from 50% to 40%) and to expand the lowest tax bracket were both rejected, leaving the current tax rate structure unchanged. This status quo, combined with various policy changes since the inauguration of the new government, has introduced considerable volatility into intergenerational transfer strategies for real estate assets.

There are also clear signals of impending changes in lending regulations. The government plans to tighten real estate lending rules in the second half of this year. The Debt Service Ratio (DSR) regulation will be enforced more strictly in its third phase, and lending restrictions for owners of multiple properties will be expanded. With the maximum mortgage term likely to be reduced from 50 years to 30 years, the need for financial support from parents is paradoxically increasing. In fact, the KB Real Estate 2024 Report analyzes that the proportion of family financial support for young people purchasing homes has risen significantly. This trend explains why young people, often referred to as the "Yeongkkeuljok," are increasingly opting for early gifts despite the burden of gift taxes.

As real estate prices continue to rise, there are no signs that the burden of inheritance and gift taxes will ease. In 2023, the number of people subject to inheritance tax was 19,944, a 56% increase compared to 12,749 in 2021. During the same period, the total determined tax amount surged by 151% to 12.3 trillion won. While the total number of gift tax filings decreased from 156,000 in 2021 to about 100,000 in 2023, the proportion of direct family (lineal ascendants and descendants) gifts increased from 59% to 61%. This means that although the absolute number of cases declined, intra-family transfers now account for a larger share.

However, the current gift tax exemption limits are capped at 600 million won for spouses and 50 million won (over ten years) for adult children from lineal ascendants. In reality, with apartment prices in Gangnam exceeding 100 million won per pyeong, even a single 30-pyeong apartment does not fall within the exemption range. As a result, parents are employing strategies such as purchasing homes in their children's names, splitting gifts over ten-year periods, and making gifts separately from each spouse to maximize exemption limits and minimize tax burdens.

Given the current policy changes and uncertainties, what scenarios should asset holders consider? First, the timing of gifts should not be viewed solely in ten-year increments; a comprehensive assessment of housing prices, housing policies, and the client's life cycle is essential. The optimal timing can be identified by considering periods when real estate prices rise by more than 10% in the short term, when legislation to expand exemptions is being reconsidered, and when major cash needs for children?such as marriage, childbirth, or studying abroad?arise simultaneously. Since the government and ruling party reintroduced a bill in March this year to raise the exemption limit for lineal ascendants and descendants from 50 million to 100 million won, such multidimensional considerations are even more important.

It is also worth considering a stepwise transfer strategy using trusts. Current trust and inheritance/gift tax laws permit "principal-preserving, income-separating" management trusts. For example, if parents entrust a rental building to a trust company and distribute only the rental income to their children in stages, the tax base is limited to the lower cash flow rather than the value of the building itself, as would be the case with a direct gift. At the same time, long-term rental income serves as both an inflation hedge and a means to strengthen the child's DSR.

"Debt succession gifts" are also being revisited. If parents transfer an apartment with outstanding loans to their children along with the associated debt, the taxable base is reduced to the net asset value. However, since financial institutions may refuse to change the name on the loan, prior agreements and fair value assessments are essential.

The "equity dilution" strategy, in which real estate is attributed to a family corporation and undervalued initial shares are gifted to children before increasing the value through development or remodeling, is spreading among high-net-worth individuals. If the planned transition to an inheritance acquisition tax in 2028 becomes a reality, the advantage of separate taxation for each beneficiary could further enhance the tax benefits of this strategy.

Life insurance should be actively used to prepare for inheritance tax payments. When inheritance is triggered while holding illiquid assets, it is crucial to avoid a "panic sale." By structuring the death benefit to be received by the legal heirs and maintaining the policy for more than ten years, the tax on insurance gains can also be minimized. The leverage effect, where the insurance payout itself serves as tax payment funds, is significant.

This year marks a multi-layered restructuring of the real estate inheritance and gift environment. Given the high degree of policy uncertainty, asset holders need to adopt an even more cautious and strategic approach. While maximizing tax-saving opportunities under the current tax rate structure, they must also remain alert to opportunities arising from future policy changes. Since real estate remains a core asset for Korean households, intergenerational asset transfer is a critical decision that goes beyond tax issues and shapes the family's future. Even amid a changing regulatory environment, robust asset management in the next period of volatility will only be possible by seeking expert advice and firmly establishing the three pillars of timing, liquidity, and governance.

Lee Inwook, Wealth Manager (WM), Kyobo Life Financial Planning Center