Definition
In Korea, inheritance tax and gift tax are taxes paid to the state when you pass property to someone else without getting anything in return. If the property moves after the owner has died, inheritance tax applies. If it is handed over while the owner is alive, gift tax applies. They were created to reduce the extreme wealth gaps that build up when riches are passed down, and to tax people fairly.
Give while alive and it's gift tax; leave it behind and it's inheritance tax
Picture parents handing a home or savings they have built up to their child. When both the giver and the receiver are alive and the property changes hands for nothing in return, that is a gift made during life.
Now flip it. When the owner dies and the property passes naturally to the family, that is an inheritance after death. Both taxes cover wealth that moves for free. The deciding difference is one thing: when the property moved.
In Korea, both taxes use progressive rates, meaning the bigger the property, the higher the rate. The more you receive, the more the rate climbs, from 10% up to a maximum of 50%.
The two taxes are calculated differently and have different deductions
The two taxes differ right from the way they measure what to tax. Inheritance tax is first calculated on the whole estate the person left behind, and then the heirs divide what is left. This is called the estate-based method.
Gift tax, on the other hand, is calculated separately on each receiver's own share of the gift. Charging inheritance tax on each heir's own share like this is called the heir-based method, but Korea's inheritance tax today uses the estate-based method. With gifts, the more people the amount is split among, the lower the rates that apply to each smaller piece, so the tax burden can shrink.
Korea also has deductions that exempt a certain amount from tax, to help families keep their lives stable. For inheritance, when there is a spouse and children, the deduction is generous: usually at least around 1 billion won (about $700,000). For gifts, the deduction for an adult child is only 50 million won (about $35,000) over a 10-year period.
A bit more precisely: why is there a 10-year add-back rule?
If inheritance tax were very heavy, anyone might rush to split up their property just before death and hand it to their children early. To block this loophole, the tax law has the 10-year prior-gift add-back rule.
Any property given in advance to an heir within 10 years before the death is added back into the full estate at the time of inheritance, and inheritance tax is calculated on the total. Gift tax already paid is subtracted, but the plan of dodging tax by splitting things up at low rates no longer works.
Because of this rule, a gift made within 10 years before death does almost nothing to reduce inheritance tax.
Common misconceptions
Everyone who inherits from their parents has to pay a huge inheritance tax.
Korea's inheritance tax has a very large basic deduction (usually 1 billion won when there is a spouse and children). So most ordinary families, whose total estate stays under the deduction limit, pay no inheritance tax at all.
Where you meet it
When parents add 100 million won (about $70,000) to an adult child's jeonse funds (jeonse is Korea's lump-sum deposit lease), the part above the 10-year deduction limit of 50 million won, which is 50 million won, is reported for gift tax. But if it is within 2 years before or after registering the marriage, a 100 million won marriage gift deduction is added, so gifts up to 150 million won carry no gift tax.
When someone inherits an apartment and savings that their parents left behind, they subtract the inheritance deductions from the total estate and pay inheritance tax on what is left.
In one sentence
A gift made while alive is taxed as gift tax, and property left after death is taxed as inheritance tax. The timing and the deduction limits change how the tax is calculated.