Navigating Inheritance Tax and Estate Tax in Japan: Key Insights

Many individuals express concerns about the possibility of inheritance tax being imposed and its potential magnitude should an event affect their family. In Japan, it’s crucial to recognize that inheritance tax doesn’t pertain to the inheritance itself, but rather taxes the person who has acquired the inheritance. This article delves into the disparity between general inheritance tax and Japan’s specific inheritance tax system

Does Japan have inheritance tax?

In Japan, collectively known as “inheritance tax,” the taxes arising upon inheritance are not universally applicable. Not everyone who receives an inheritance is obligated to pay inheritance tax. Although discussions often revolve around the prospect of selling property or relinquishing a residence due to tax burdens, it’s estimated that less than 10% of individuals are truly subjected to inheritance tax.

Japan’s inheritance tax is segregated into two categories: estate tax and inheritance tax. Essentially, estate tax falls under the umbrella of inheritance tax. The valuation of inherited property employs two distinct methods: the estate tax approach and the estate acquisition taxation method.

Estate Tax Method

The estate tax method encompasses taxing the decedent’s assets collectively, irrespective of the number of heirs or the inheritance distribution. After deducting the tax, the remaining assets are divided among the heirs. This approach is widely employed by many nations

Estate Acquisition Tax Method

The estate acquisition tax method entails taxing assets based on the inheritance each heir receives. Consequently, the total inheritance tax amount fluctuates in proportion to the percentage of inheritance. Heirs who inherit larger amounts are subject to higher taxes. This method is implemented in Japan.

Whether or not Inheritance Tax is Charged Depends on the Amount of Deduction

The application of inheritance tax in Japan, limited to fewer than 10% of the populace, hinges on two factors:

(1) Total Amount of Personal Inheritance

(2) Number of Legal Heirs

Primarily, Japan’s inheritance tax incorporates a “basic deduction” that exempts taxation if the inheritance doesn’t exceed a specific threshold. The basic deduction, having undergone multiple revisions, is currently calculated as follows:

Basic deduction = 30 million yen + 6 million yen × number of legal heirs.

Put simply, even if there is just one legal heir, a deduction of 36 million yen applies. Consequently, if the total inheritance is less than 36 million yen, inheritance tax isn’t imposed. Furthermore, if the heir includes a spouse, tax won’t be levied up to 160 million yen or the spouse’s legal inheritance, whichever is higher.

The computation of inheritance tax follows this formula

Amount of inheritance = Total amount of inheritance – Debt – Funeral expenses – Non-taxable property (*) + (Value of gifted property subject to taxation in a calendar year within 3 years before the start of inheritance)

(*Tax-exempt property encompasses:Graveyards, Buddhist altars, ritual utensils, etc. Property donated to national or local governments and specific public interest corporations)

Number of legal heirs up to 5 million yen × the amount of life insurance benefits

Number of legal heirs up to the amount of death retirement allowance × 5 million yen

Subtracting the basic deduction from the calculated inheritance amount yields the total taxable inheritance. If this total is negative, no inheritance tax is due.

Total taxable estate = Estate amount – Basic deduction

In Japan, given the modest scale of personal assets and substantial tax exemptions, most individuals are exempt from inheritance tax. Inherited assets aren’t considered income, obviating the need for tax filings. However, if the deceased engaged in business activities, filed annual tax returns, or earned income from property sales shortly before their demise, a tax return must be filed within four months of their passing—a process termed “quasi-tax return.”

Moreover, inheritance tax in Japan must be filed within 10 months of the inheritance occurrence, necessitating swift action in emergencies.

What is the State of Inheritance Tax and Estate Tax around the World?

In the global context, nations either implement inheritance tax or abstain from doing so.

Countries with Inheritance Tax (Estate Tax)

USA, Korea, Taiwan, UK, France, Germany, etc.

Countries without Inheritance Tax

Europe: Sweden, Italy, Canada

Asia: China, Hong Kong, Singapore, Thailand, Malaysia, Indonesia, India, etc.

Oceania: Australia, New Zealand, etc.

Similar to Japan, Germany and France impose taxes on the individuals inheriting, as opposed to taxing the inheritance itself.

Estate Tax Case | USA

The United States briefly suspended inheritance tax in 2010, but it has since been reinstated. However, the tax exemption threshold has expanded significantly. (As of 2018, the U.S. heritage tax boasts a considerable basic deduction of $11.18 million, roughly equivalent to ¥1.2 billion.)

In the U.S., “Estate Tax” is applicable upon inheritance. This involves taxing the estate left by the deceased and subsequently distributing the remaining assets among the heirs. In practice, estate administrators oversee tasks such as consolidating debts, covering overhead costs, and paying U.S. heritage taxes. Beyond inheritance tax, navigating through various state laws and regulations makes overseas inheritance procedures lengthy.

Differences in the Way of Thinking Between Inheritance Tax and Estate Tax in Japan

While Japan taxes the recipient based on their acquired assets, other countries like the U.S. adopt an estate tax that aims to settle the deceased’s accumulated earnings during their lifetime. Furthermore, if Japanese individuals inheriting abroad are subject to foreign inheritance tax, they can claim a deduction on overseas property inheritance tax, effectively eliminating double taxation.

Conclusion

Reflecting on the insights provided, the notion of inheritance tax may be familiar to those in Japan, but the concept of estate tax might be less known. Overseas, inheritance often prompts “estate tax,” a levy grounded in liquidating the deceased’s lifetime earnings. This differs slightly from Japan’s approach of taxing individual assets and distributing the proceeds among heirs. Although less than 10% of the Japanese population experiences inheritance tax, it is good to know how to deal with it appropriately.

Disclaimer: The information provided in this blog post is intended for general informational purposes only and should not be considered as legal, financial, or tax advice. Tax laws and regulations can vary by jurisdiction and change over time. It is recommended that you consult with a qualified tax professional, legal expert, or financial advisor before making any decisions based on the information presented in this post. We do not assume any liability for any potential inaccuracies, errors, or omissions in the content, nor for any actions taken or not taken based on the information provided herein.