Lifetime Gifting Has Three Routes, Not One

"While I'm still healthy, I'd like to pass assets to my children a little at a time. The first ¥1.1 million each year is tax-free, isn't it?" We hear this from people who have built wealth in Japan again and again. The answer is: yes — but that is only one of the entrances. Passing ¥300 million to two children at ¥1.1 million each per year would, on a simple calculation, take well over a century. Annual gifting is one instrument of lifetime transfer, but on its own it cannot move a large estate. Japanese tax law in fact provides three routes, each with a different character.

Route 1 — Annual Gifting: Small Amounts, Over Time

The first is annual (calendar-year) gifting. Gift tax is, in principle, calculated after deducting ¥1.1 million from the gifts received in a single year (the basic-deduction special measure under Article 70-2-4 of the Act on Special Measures Concerning Taxation; the ¥600,000 figure in Article 21-5 of the Inheritance Tax Act is the base rule, and the ¥1.1 million comes from this special measure). For two children, up to ¥2.2 million a year can move without tax.

There is, however, a mechanism that cannot be overlooked. Gifts received from the decedent within a defined period before the inheritance are added back to the estate and the inheritance tax is recalculated (Article 19 of the Inheritance Tax Act). That period has been extended in stages from the former three years to seven. In other words, what is transferred in the most recent years before death returns, in effect, to the inheritance tax base. The earlier and longer annual gifting continues, the more tax-free transfer capacity accumulates; the later it begins, the more heavily this add-back weighs.

Route 2 — Settlement at Inheritance: Not Exemption, but Locking the Valuation

The second is the settlement-at-inheritance system (sōzoku-ji seisan kazei). It may be elected for gifts from parents or grandparents aged 60 or over to presumptive heirs aged 18 or over (Article 21-9), with a cumulative special deduction of up to ¥25 million (Article 21-12). Amounts above that are taxed at a flat 20% gift tax (Article 21-13).

The point to grasp is that this is not an exemption. Assets gifted under this election are added back to the estate at inheritance and taxed there. Its essence is not tax reduction but "transfer now, settle at inheritance." Where, then, is the value? Because the amount added back is the valuation at the time of the gift, moving an asset expected to appreciate at an early stage locks the tax base at the lower valuation at transfer rather than the higher value later. Understood as securing not an exemption but a locked valuation, its role becomes clear. Note that since 2024 the settlement system also carries an annual ¥1.1 million basic deduction, and amounts within it are not added back to the estate (Article 70-3-2 of the Act on Special Measures Concerning Taxation).

Route 3 — Support Between Family Members: Not Transferring, but Spending

The third is not "transferring" assets but directly bearing living and education costs as a person under a duty of support. Gifts between those with a mutual duty of support, made to cover living or education expenses and within the ordinarily necessary range, are not subject to gift tax (Article 21-3, Paragraph 1, Item 2 of the Inheritance Tax Act). There is no ceiling on the amount, no limit on the number of years, and it is not subject to the pre-inheritance add-back. But money kept remains an asset — so its essence lies in reducing the total estate by spending.

Combining the Three

The practical logic is not "A or B." Cash moves through annual gifting; assets expected to appreciate use the settlement system to lock their valuation; day-to-day education and living costs are borne directly under the duty of support — assets of different character are routed to the path that fits each. One caution: between the same donor and recipient, once the settlement-at-inheritance system is elected, there is no returning to annual gifting (Article 21-9). Designing different routes for different children is therefore a realistic option.

The earlier lifetime gifting begins, the longer the annual capacity can be used and the sooner a valuation can be locked. Because the annual capacity is divided year by year, when — and which asset, through which route — to move should be planned within the year.

This article provides general information on tax systems and does not constitute individual tax consultation. Specific filings and tax computations are handled by licensed partner tax accountants whom we introduce.