Is the 'Lovebird Gift' (Spousal 20 Million Yen Deduction) Really Beneficial?
A system like a 'reward for 20 years of marriage'
In the world of gift tax, there is a system commonly known as the 'Lovebird Gift.' Formally, it is the spousal deduction for gift tax. Here is what it entails.
If a couple married for 20 years or more gifts residential real estate (or funds for its purchase) to each other, up to 20 million yen is exempt from gift tax, in addition to the basic deduction of 1.1 million yen.
In other words, it is a system that allows you to pass on your home to your spouse tax-free up to a total of 21.1 million yen. It is affectionately known as the 'Lovebird Gift' because it sounds like a 'reward' for a couple who has been together for many years.
'I want to leave my home to my wife. It's been 20 years, so I should definitely use it.' You might think that. However, if you calculate it carefully, there are actually many cases where it is 'better not to use it.' This time, I will delve into the reasons why.
Basics of the system - The requirements are simple
First, let's organize the requirements for application.
'Filing is mandatory even if the tax amount is zero' is the same pitfall as the special exceptions we have looked at so far. If you forget to file, you cannot receive the deduction.
Why is it often 'better not to use it'?
This is the main point. When viewed calmly, there are three headwinds against the Lovebird Gift.
Reason 1: In the first place, there is a larger tax-free allowance for inheritance
Remember, for inheritance, there is a spousal tax reduction (tax-free up to 160 million yen or the statutory inheritance share).
Even if you do not gift your home during your lifetime, if you pass it on through inheritance, most households will not have to pay inheritance tax for the spouse. Furthermore, you can also use the special exception for small-scale residential land (80% reduction in valuation up to 330 square meters) for the land of the home.
In other words, while the '20 million yen tax exemption' may look large at first glance, the preferential treatment when passing it on through inheritance is often far greater. The tax necessity of going out of your way to gift it during your lifetime is actually scarce—this is the starting point.
Reason 2: Gifting incurs 'costs that do not exist in inheritance'
Even when passing on the same home, the costs involved in the transfer differ between gifting and inheritance.
For a 20 million yen property, the registration and license tax alone is 400,000 yen for a gift, and 80,000 yen for an inheritance. If you add real estate acquisition tax, the cost of gifting can reach the scale of several hundred thousand yen. Even if the gift tax is zero, the transfer costs are definitely incurred.
Reason 3: You might 'miss out on using' the special exception for small-scale residential land
If you gift the land of your home to your spouse during your lifetime, that portion is removed from future inheritance assets. As a result, it will also be excluded from the scope of the special exception for small-scale residential land (80% reduction) that could have been used at the time of inheritance.
Is there any point in transferring assets during your lifetime, even at the cost of giving up the powerful special exemption that reduces the valuation by 80%? In many cases, the answer is 'no'.
Cases where it is still 'worth using'
So, is the spousal gift a useless system? Not necessarily. It is worth considering in the following situations.
1. Couples planning to sell their home - Double-dipping the 30 million yen deduction
This is the most effective use in practice, which I have introduced in previous columns.
When you sell your home, you can use the 30 million yen special deduction for residential property, but this deduction applies per owner. If you use the spousal gift to make the home jointly owned by the couple before selling it, both spouses can receive a 30 million yen deduction, for a total of 60 million yen. If you are planning to sell a home with a large capital gain, this can result in significant tax savings.
In fact, I have heard of such a case. A couple who owned a condominium in a prime location in the city center put the home in their joint names and then sold it to their daughter and her husband. In that instance, both the husband and wife were able to receive the 30 million yen deduction.
If you look closely at this case, it is designed in two stages.
The second stage is actually extremely important. There is a rule that the 30 million yen deduction does not apply to sales to 'specially related persons,' such as spouses or direct blood relatives (children, grandchildren). If they had sold it to their daughter in her name, the deduction would have been zero because it would be a sale to a direct blood relative.
Since a son-in-law is not a direct blood relative, there is room for application if other requirements, such as living separately, are met. It can be said that this is a fine-line scheme that only succeeded because both the seller's name (joint ownership) and the buyer's name (son-in-law) were carefully planned. In transactions between relatives, always be sure to check with an expert in advance, including 'whose name to buy in'.
2. As preparation for legal reserve of inheritance and family disputes
If you transfer your home to your spouse during your lifetime, that home is, in principle, confirmed as the spouse's property. Moreover, under the 2019 inheritance law revision, it is presumed by law that gifts of residential real estate between spouses married for 20 years or more do not need to be brought back into the estate as 'special benefits' during the division of the estate.
In other words, if you want to 'ensure the home remains with your spouse' in relation to other heirs, you can expect the effect of separating the home from the seeds of conflict. For families where much of the assets are in the home and there is concern about conflict between heirs, this can be a choice to buy 'peace of mind' separate from taxes.
3. When assets are very large and you want to distribute them to the spouse's side
There are also cases where, with a large asset scale and careful planning that includes the secondary inheritance, a strategy is taken to intentionally move assets to the spouse's side. However, this only works if there is a total tax simulation.
Measuring stick for judgment - Choose by 'purpose', not by 'tax'
Let's organize the judgment criteria when considering a spousal gift.
If the only goal is tax savings -> In many cases, it is more advantageous to pass it on through inheritance (spousal tax reduction + small-scale residential land exemption + lower transfer costs)
If you are planning to sell your home -> It is worth calculating the effect of the 30 million yen deduction x 2
If you want to ensure the home remains with your spouse -> Consider it as a measure against family disputes, combined with the presumption of exemption from bringing back assets into the estate
In any case → A tax return is mandatory even if the gift tax is zero. Don't forget the transfer costs.
The 'system you can use after 20 years of marriage' is not necessarily a 'system you should use after 20 years of marriage.' Before jumping in because you are attracted by its cute name, confirming your family's goal—whether it is tax savings, selling, or preventing disputes—is the way to use it without regrets.
What is the best way to pass on assets between spouses? Let's organize this together, starting with a calculation of the pros and cons through to inheritance.
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※ The application requirements for the spousal deduction for gift tax, the tax rates for registration and license tax and real estate acquisition tax, and the presumption of exemption from bringing back assets into the estate, etc., vary depending on individual circumstances. Please be sure to consult with a professional such as a tax accountant before implementation.
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