Are You Planning on Dying?
Benjamin Franklin said in a letter dated 1789, “Nothing is certain except death and taxes.”
With the above in mind, I thought it might be worthwhile to briefly outline a particular tax that many of us either prefer not to think about or may not even be aware of… Inheritance Tax. This article is designed purely as an introduction and general overview of Inheritance Tax. As always, please consult your Tax Accountant for a more detailed analysis of your particular situation and an accurate assessment of your tax position.
What Is Inheritance Tax?
Inheritance Tax 相続税 souzoku zei is imposed on the assets acquired through inheritance or gifted from a deceased person. If the total value of assets exceeds the tax-exempt threshold, the payment of inheritance tax is required within ten months after the death of the benefactor. i.e., If you die on January 15th, your heir(s) must make the tax payment by November 15th.
*If a legal will has been written, the division of assets can reflect whatever percentage the benefactor desires however, this can still be challenged in court.
Who Are the Heirs?
When a person dies without a will, their assets are transferred to their legal heirs called 法定相続人 houtei souzoku nin. The spouse is always the legal heir and is entitled to at least 50% of the assets. Please note he or she may agree to claim less than 50% of the assets and divide the remaining among other eligible heirs. After the spouse, the line of inheritance begins with the children of the deceased. If the deceased had no children, the line of inheritance moves upward to his or her parents. If the parents are no longer alive, siblings of the deceased are next in line, and so on.
How Is Inheritance Tax Calculated in Japan?
Step 1. Figure out the Gross Asset Value.
According to the Japanese inheritance tax laws, the asset 財産 zaisan includes cash, bank deposits, securities, jewelry, precious metals, land, houses, automobiles, life insurance payouts, and any severance pay which the deceased was supposed to receive. Anything that has monetary value is considered as zaisan. Please note the value of assets may not be the same as the market value. There is a special calculation formula for land, houses, etc. In most cases, you will need to speak to a licensed Japanese tax accountant to file an inheritance tax return that captures the correct value of the assets.
Step 2. Determine the Gross Taxable Asset
Gross Taxable Asset is Gross Asset – Exempt Items
Deduct the following items from the Gross Asset
- Debts, mortgages, loans.
- Funeral expenses, gravestones, family alters.
- Donations to the Japanese government, local ward office, certified NPOs, etc.
- The first 5,000,000 JPY of a life insurance payout (both Japanese and foreign) × the number of legal heirs.
- The first 5,000,000 JPY of severance pay × the number of legal heirs.
Let’s use the example of the Gross Taxable Assets being valued at 210,000,000 JPY.
Step 3. Determine the Net Taxable Asset
Net Taxable Asset is Gross Taxable Assets – Basic Deduction
Basic Deduction is calculated at 30,000,000 JPY + (6,000,000 JPY × the number of legal heirs)
Let’s say the husband passed away, and the wife (Mary), son (Alex), and daughter (Beth) are legal heirs/beneficiaries.
Net Taxable Asset is 210,000,000 JPY – [30,000,000 JPY + (6,000,000 JPY × 3 people)] = 162,000,000
If the basic deduction is more than the gross taxable asset, no inheritance tax is imposed.
If the assets are divided into the statutory share; Mary ½, Alex ¼, and Beth ¼, the Net Taxable Asset per beneficiary are as follows:
- Mary 162,000,000 × ½ = 81,000,000 JPY
- Alex 162,000,000 × ¼ = 40,500,000 JPY
- Beth 162,000,000 × ¼ = 40,500,000 JPY
Step 4. Determine the gross inheritance tax
Calculate the Gross Inheritance Tax per beneficiary (Refer to the tax rate deduction chart below).
- Mary 81,000,000 × 30% – 7,000,000 = 17,300,000 JPY
- Alex 40,500,000 × 20% – 2,000,000 = 6,100,000 JPY
- Beth 40,500,000 × 20% – 2,000,000 = 6,100,000 JPY
Gross Inheritance Tax = 17,300,000 + 6,100,000 + 6,100,000 = 29,500,000 JPY
Step 5. Apply the spouse exemption (if any)
Based on Japanese Inheritance Tax law, the spouse is exempt from paying Inheritance Tax on Gross Taxable Asset up to 160,000,000 JPY or his or her statutory guaranteed share, whichever is higher. In this case, Mary does not owe Inheritance Tax as her Gross Taxable Asset is 210,000,000 × ½ = 105,000,000 JPY.
Step 6. Apply the inheritance ratio (in this case 1/4) to the Gross Inheritance Tax
So how much inheritance tax do Alex and Beth owe?
- Alex 29,500,000 × ¼ = 7,375,000 JPY
- Beth 29,500,000 × ¼ = 7,375,000 JPY
Q1: I do not have any immediate family, and I have not written out a will. What happens to my assets when I die?
A1: Your assets will become the property of the Japanese government If you do not have a will, parents, siblings, spouse or children.
Q2: After my father passed away, I found out I have a half brother/sister. Can he or she have any legal claim to my father’s assets?
A2: Yes, children born out of marriage who are legally recognized (認知ninchi) have the same rights as children born within a marriage.
Q3: Does the spouse need to file the tax return even though he or she has no inheritance tax due?
A3: Yes. 160,000,000 JPY spouse exemption can be applied only if he or she files the tax return.
Q4: I don’t have enough money to pay the inheritance tax in a lump sum. What should I do?
- Sell the assets you inherited
- Give the equal value of actual assets (bonds, stocks, lands, houses, etc.) to the tax office
- Apply for an extension
- Talk to your local Tax Office
If you are not sure where to find a Japanese tax accountant, please feel free to contact us. We will be happy to put you in contact with the relevant tax professionals.
Sources (Japanese Only):