In Korea, Will Gift Tax Be Imposed When Receiving Grandparental Support for University Tuition?

Introduction:

A recent dilemma faced by Mr. A, a typical office worker, arose when his son entered law school. With Mr. A's income alone, covering his son's law school tuition seemed daunting. Consequently, Mr. A explained the situation to his affluent father, who readily agreed to fully support his grandson's tuition fees.

However, later discussions with colleagues led Mr. A to seek advice from a tax professional, as he heard that his son might be subject to gift tax due to his grandfather's support.

According to the '2023 Tax Savings Guide' published by the National Tax Service, if grandparents provide financial support for their grandchildren's education or living expenses despite the child's parents having the ability to support them due to their earned or business income, gift tax may be imposed under the Inheritance and Gift Tax Act (IGTA).

Scenario Analysis:

In the case of Mr. A, who has a certain level of income and thus the ability to support his son, his son receiving support from his grandfather may indeed trigger gift tax liability. The provision exempting gift tax on parental support for children's education and living expenses (IGTA Article 46, Clause 5) may not apply in this situation.

However, what if grandparents are absent due to death or financially incapable of supporting their grandchildren?

In such cases, financial support from grandparents to grandchildren for education or living expenses is generally deemed socially acceptable, and thus not subject to gift tax liability. Nevertheless, the term "socially acceptable" implies that excessively high expenses, such as exorbitant study abroad fees, may still be subject to gift tax.

Conclusion:

Whether Mr. A's son will be actually subject to gift tax remains uncertain. This is because direct lineal descendants are entitled to a gift tax deduction of 50 million won (20 million won for minors) within a 10-year period. If the support amount from Mr. A's grandfather is less than 50 million won, Mr. A may not be required to pay gift tax. Additionally, the gift tax deduction limit for other relatives is 10 million won.

This highlights the importance of understanding gift tax implications when receiving financial support from grandparents for education expenses.

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