OVERVIEW
Overview
Transferring property to a related party below market value engages two provisions at the same time. For the buyer, the Inheritance and Gift Tax Act treats part of the difference between market value and consideration as a gift and charges gift tax. For the seller, the denial of unfair act or calculation under the Income Tax Act recalculates capital gains tax as though the property had been sold at market value rather than for the consideration actually received. An above-market purchase, where property is bought for more than it is worth, is taxed on the same structure.
The difference between the two thresholds is a frequent source of difficulty in practice. Gift tax applies where the difference is at least the lower of 30 per cent of market value and 300 million won, while the denial of unfair act or calculation applies where it is at least the lower of 5 per cent of market value and 300 million won. There is therefore a band in which no gift tax arises but capital gains tax is nevertheless recalculated. VALUE Tax & Accounting settles how market value is to be determined before the transaction, and sets out a safe price range that clears both thresholds together with the evidence required.
KEY ISSUES
Key tax issues in below-market transfers
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01
Gift arising from a below-market purchase
Where the difference between market value and consideration is at least the lower of 30 per cent of market value and 300 million won, the difference less a specified amount is treated as a gift and charged to gift tax on the buyer.
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02
Denial of unfair act or calculation
Where the difference is at least the lower of 5 per cent of market value and 300 million won, the seller's transfer value is taken to be market value and capital gains tax is recalculated. The threshold is lower than for gift tax.
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03
Determining and evidencing market value
Market value is established from comparable sales, appraised value, and expropriation or auction values in that order. For property with many comparable transactions, such as an apartment, filing at the published price is difficult, so obtaining an appraisal in advance is the safer course.
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04
The scope of related parties
This extends beyond spouses and lineal ascendants and descendants to relatives within a specified range, and to controlled companies and their officers. Parties who appear unconnected in form may still be related.
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05
Actual movement of the consideration
Whether the consideration was actually paid is examined. Where there is an agreement but no movement of funds, the transaction is treated not as a sale but wholly as a gift.
HOW WE HELP
How VALUE Tax & Accounting responds
Setting the price range before the transaction
We establish market value and calculate the price range that satisfies both statutory thresholds. Where an appraisal is required we advise on when it should be obtained.
Comparing the alternatives
We calculate a below-market transfer, a straight gift, a gift with assumed debt and a sale at market value on the same basis, and compare the total burden and the cash flow.
Structuring evidence and filing
We assemble the material supporting the substance of the transaction, including the agreement, the record of transfers and the appraisal report, and deal with the capital gains tax and gift tax filings together.
FAQ
Below-market transfer FAQ
Q How far below market value becomes a problem within a family? expand_more
Gift tax applies where the difference is at least the lower of 30 per cent of market value and 300 million won; capital gains tax is recalculated where it is at least the lower of 5 per cent of market value and 300 million won. The thresholds differ, so both must be checked.
Q If no gift tax arises, is the position safe? expand_more
No. Clearing the gift tax threshold does not clear the threshold for denial of unfair act or calculation. In that case the buyer bears no gift tax but the seller's capital gains tax is recalculated on market value.
Q How is market value determined? expand_more
Comparable sales or appraised values within the valuation period take priority. For an apartment with comparable transactions that price is the market value, so filing at a lower published price is difficult. Where a dispute is likely, obtaining an appraisal is the safer course.
Q Does a transaction with an unrelated party also cause difficulty? expand_more
Where there is no related-party connection, the question is whether there was a justifiable commercial reason for the terms. A separate provision treats a difference of 300 million won or more between market value and consideration as a gift, however, so larger amounts require checking.
Q What if the price is to be paid later? expand_more
Setting a payment date and actually meeting it causes no difficulty, but where there was in substance no intention to collect, the whole transaction may be treated as a gift. The loan agreement and the record of transfers must evidence actual performance.