Revisions to the inheritance tax in Japan

TOKYO —

Over 23% of the Japanese population is over the age of 65, the highest proportion of any country in the world. By 2055, this ratio is expected to increase to over 40%. This demographic shift is already having an impact on Japanese society. As the elderly increase as a proportion of the population, the effect on society and public policy will continue to increase. In this timely article, Zoe Ward, publisher of Japan Property Central, takes a look at the change to the inheritance tax. It will be interesting to observe how this change will affect the timing of property transactions, as parents decide when and how to pass wealth on the the next generation.

There has been recent movement to increase the inheritance taxes and reduce the tax deductions as a way to distribute wealth. Osaka Mayor Toru Hashimoto has even suggested collecting the entire inheritance so that no wealth is passed onto the next generation.

The revision to the inheritance taxes in Japan was scheduled to go in effect from April 2011, but was delayed due to the Tohoku disaster. The current economic climate suggests that taxes will be increased, and the terms of the increases may be decided this year.

The changes to inheritance taxes began as early as 2010, when the exception for the deduction on small-sized land was revised.

Revision to reduction in value for tax purposes

The exception previously allowed for a reduction of 80% of the value of the land up to a certain size. For example, if the inherited land had a value of 100 million yen, the value for tax purposes was only 20 million yen. After the revision, applying this exception became increasingly difficult. The new revision means that inheritance tax is incurred in many more cases than before.

Under the new conditions, the reduction that once applied to inheritors who were not living in the property nor continuing to use it as their business has been reduced to zero. There are many cases where the elderly parents are living separate from their children, which means many inheritors will be hit with higher taxes than before.

Revision to basic deduction

The basic deduction of 50,000,000 yen plus 10,000,000 yen per inheritor is set to change. The proposed revision would reduce this deduction to 30,000,000 yen plus 6 million yen per inheritor. The maximum inheritance tax rate would also be increased from 50% to 55% (applied to the portion of the inheritance that exceeds 600 million yen).

Parents who want to transfer their assets to their children while still alive will be hit with gift tax, which is also set to rise from 50% to 55% at the maximum tax rate.

Case Study

A-san’s mother has passed away. She was living in a house on a 200-sq-meter block of land in Tokyo’s 23 wards with an estimated value of 80 million yen. A-san also has a younger sister. A-san lives in an apartment he has purchased, while his younger sister lives in a house that her husband has purchased. Their mother has left them her house and an additional 10 million yen in cash.

The old system

There is a basic deduction on the inheritance of:

50,000,000 yen + [10,000,000 yen x number of inheritors]

The deduction in the case above will amount to 70,000,000 yen.

Prior to the tax revision, A-san would be able to apply a 50% reduction to the value of the land, which would reduce the value for tax purposes to 40 million yen. After adding the 10 million yen in cash, the total value of the estate would be 50 million yen. This is less than the deduction of 70 million Yen, so there would be no inheritance tax obligation.

The new system

Basic deduction on inheritance:

30,000,000 Yen + [6,000,000 yen x number of inheritors]

The deduction in the case above will amount to 42,000,000 yen.

Under the new revision, A-san would be not able to apply any reduction to the land value so it would remain at 80 million yen. The total value of the estate, including the cash, would be 90 million yen. The 48 million yen left after the deduction would be taxable and the total inheritance tax payable would be 6,200,000 yen (3,100,000 yen for each inheritor). Although the changes to the reduction levels have not affected A-san, the change to the basic deduction has resulted in a much higher tax payable.

If A-san or his younger sister had lived with their mother in a 2-house home (“ni-setai-jyutaku”*), then the 80% reduction on value could apply.

If the inheritor is currently renting their primary address, the 80% reduction could also be applied. With the example above, if A-san was renting his apartment while his sister owned her house, A-san could apply the 80% reduction to his portion of the inherited land, while his sister would not be able to apply any reduction.

If the parent is moved into an aged-care facility, and their former home is leased out to a tenant, the reduction is 50%.

Capital Gains Tax

Capital gains tax will also apply when you sell the inherited real estate.

*A house specifically built for two families to live under one roof. It may have separate entrances, living, bathroom and kitchen spaces.

Sources:
The Mainichi Shimbun, March 6, 2012.
President Online, March 6, 2012.
The Yomiuri Shimbun, March 9, 2012.
The National Tax Agency (www.nta.go.jp)

This story originally appeared on Real Estate Japan.

Author Infomation

Zoe Ward
Zoe Ward
Zoe Ward is the publisher of Japan Property Central and has extensive experience in the Tokyo real estate market, working for some of the advertising agents on Real Estate Japan.
Website: http://japanpropertycentral.com/
  • 7

    tkoind2

    And yet there is dead silence in Japan over this topic. People here are too weak. They let the government screw them openly and intensly while doing absolutely nothing about it.

    As for Hashimoto's notion to take 100% of inheritance, I guess his opponents are wrong, he is not a right wing dictator, he sounds like he wants to be a Stalinist type dictator instead. This is not the way to redistribute wealth. It is the way for the governement to instituationalize theft.

    If you are serious about the redistribution of wealth, let's meet up and I can give you a long lecture in real programs to help level the economic playing field in favor of working people.

    Moderator: Better yet, please submit an article on the subject for the Opinions section.

  • 3

    napoleancomplex

    i'm definitely not in favour of this double taxation: In the process of settling estates, property is probably going to be sold, stock portfolios and other assets valued at the date of death and more than likely liquidated, probably triggering capital gains... these taxes should be liable to the estate only. Once that is settled, any left over monies should be distributed to the heirs. Don't see what the government has done to deserve 100% of these assets

  • -2

    japan_cynic

    Large tax-free inheritances perpetuate inequality and injustice. Since when did the children of a rich person have any "right" to this money anyway? In the worked example, the overall tax rate on the estate under the new system is only about 7%, hardly punitive.

  • 3

    tkoind2

    "Don't see what the government has done to deserve 100% of these assets."

    It is easier for them to steal from everyone than to actually sort out how they spend. Because their buddies depend upon their excessive spending and that means they cannot quit, only give it lip service.

    The new consumption tax is the same, but with far heavier consequences if applied as planned. Japan may well be on the spiral down to the mid teens of global economies if they don't soon do something about this useless series of governments.

  • 0

    ironchef

    this new inheritance tax system is a bunch of crap. Dont buy any real estate here in Japan.

  • -2

    Johannes Weber

    Taxing inheritance is one of the fairest taxes in existence. You tax people who did nothing to earn these assets (if they did, put them in jail, since that would mean they killed their parents). However, inheritance tax payment should be delayed payment (a few years). In that case, inheritors could still decide in a reasonable time what they want to do with their inheritance and sell it under better conditions or keep it operating, if its a profitable business. Higher inheritance tax is far better than higher income tax.

  • 5

    y3chome

    Not exactly fair..... I work my whole life to provide or my loved ones and family and grandchildren. Not to be wasted by the govt.

  • 3

    tkoind2

    Johannes. I am sorry but you are absolutely wrong here. It is not fair in that it is clearly a policy of taxing money that has already been taxed previously. Further, if we are talking about the simple act of passing money down from one generation to another then the money remains in the family, it belongs to the family.

    Look at it this way. Most families in the world depend upon some cross generational wealth transfer to survive. Whether that is a home, a small business or just the accumulated savings of parents moving on to the kids. It is often the main reason that adults save money, to give it to their kids.

    The government, and you apparently, want to tell us that this is not the case. That these traditions are not reality. That instead we are seeing undeserving people make money from doing nothing. And that is utter nonsense since often those inheriting money have spent considerable wealth supporting aging parents.

    We should change how we see family assets. If something belongs collectively to a family it should not be taxed. If it is a transfer of wealth to a nonfamily person, then perhaps we should look at it differently. But even then, if the recipient is playing the role of family, we need exceptions.

    Easiest solution is to ban this tax on anything under the average family inheritance. And set that amount at a rational level to allow hard working families to keep what they have earned in the family.

  • 3

    tkoind2

    y3chome. Absolutely!!! The government wastes enough of our money without stealing our family's legacy. Let them learn to spend more effectively and leave us alone!

  • -1

    japan_cynic

    The threshold is at the level that most estates pay nothing, or at worst a trivial sum (even with the new rules). Why are people complaining about something they don't understand without doing the most elementary research?

  • 0

    y3chome

    Govt had their pound of flesh already now they want cake!!!!!!

  • -1

    cleo

    Most families in the world depend upon some cross generational wealth transfer to survive.

    Really?? Any stats to back up that claim? Coz it's a new one on me. My parents got nothing from their parents (dirt poor, nothing to leave); I got nothing from my parents (Dad's money, what little there was, all went to his second wife as per UK law); while I hope I'll be able to leave a little bit to my kids, it'll be a windfall; they certainly aren't depending on anything from me to survive. I already made sure they had a good education and will be able to stand on their own two feet, that's my legacy to them: it doesn't need me to die for them to benefit from it, and it can't be taxed away from them.

    Easiest solution is to ban this tax on anything under the average family inheritance. And set that amount at a rational level to allow hard working families to keep what they have earned in the family.

    The deductions are very generous and rational, so that the average family doesn't pay.

  • -3

    Johannes Weber

    @tkoind2:

    The best thing parents can do for their children is to provide (and finance) their education. Parents can empower their children to build their own lives. This is worth far more than any inheritance money. It is true that the money has been taxed (but which extent is another question, however) when it was income of the (now deceased) parents, but it is again income for the children without them doing anything for their right to earn it. I am a firm beleiver in meritocracy. Consider it a "family company". A company must also pay taxes for expenses and revenues.

    I am not against inheritances - but I am against people receiving benefits which they feel entitled to without working hard. If the inheritance tax allows delayed payment, then people can decide how to deal with the cost. And never, ever forget - it was the state that provided the background for the parents to earn their wealth and keep their wealth safe. If it is about property for living and so on, a tax at the level of less than 10% for average families is completely fair.

    The state provided the conditions that they could build up a company, that they had workers who were able to commute to their place, the state paid for protecting the place from fires, tsunamis, earth quakes and banksters as good as the state could. It is just fair to give something back. The state has to balance out chances for people wherever it can.

    Furthermore, if I think of a family-owned company - those workers who kept the company going for an entire generation have certainly more moral rights as heirs than some spoiled child who has no plan of the company and who is going to ruin it. The state has the duty to protect these people as good as the state can. Therefore, the state should be in a position to control (for a while) that a heir doesn't destroy his inheritance, if the lives of others depend on it.

  • 3

    davestrousers

    Taxing inheritance is one of the fairest taxes in existence. You tax people who did nothing to earn these assets (if they did, put them in jail, since that would mean they killed their parents).

    Pretty cold statement. Family works both ways - its a structure, a bond between parent and child. Most people care for their parents through all the pain and strife that life has to offer, whether it be bereavement, physical illness, mental degredation - they're there for them. That's what they do to earn it.

    High inheritance tax diminishes one of the most important incentives for working hard and creating wealth. Wanting to leave something for your children is instinctive and natural. Who wants to work hard, get taxed all their life and then leave a big part of their money to the state?

  • -5

    cleo

    Wanting to leave something for your children is instinctive and natural. Who wants to work hard, get taxed all their life and then leave a big part of their money to the state?

    Wanting to set your kids up to succeed in their own right is instinctive and natural. At the lower levels, leaving the kids a bit of a windfall might help dull the blow of losing a (hopefully) beloved parent; but when inherited fortune is passed on down the line creating generations of poorly-educated wastes-of-space who never earned a penny and will never need to work, it's time for the taxman to do a bit of levelling out. Inheriting bags of money that haven't been earned is what diminishes one of the most important incentives for working hard. If the youngsters want a pot o'money, let them earn it by the sweat of their own brow.

    If you don't want to leave a big part of your money to the state, do what I intend to do - blow it on a profligate old age. In addition to helping the economy by putting money in circulation, that also ensures that you get to decide how your money is spent.

  • 10

    presto345

    Osaka Mayor Toru Hashimoto has even suggested collecting the entire inheritance so that no wealth is passed onto the next generation.

    This man is a danger to society.

  • 2

    GW

    presto,

    correct if that insanity ever become reality it wud INSTANTLY kill the economy, hashimoto clearly is lacking in grey matter

  • 1

    GW

    These sort of taxation ideas really give me an insentive to NOT pay off my mortgage, let the govt repo my place when I croak from the bank! LUNACY!

    Its bad enough Japan is covered is decaying properties as is, these new stupid taxation ideas will leave more because any buyer will know the seller is being SHAFTED & whatever the value of the asset may be you can bet any buyer wud only offer a MUCH lower price but the seller is still on the hook for some ""valuation"" this is a recipe for a lot of messed up situations

    And the cash goes to a govt who then pilfers a bunch & flushes the rest down the crapper, this is pretty stupid

  • 1

    AEROCASTER

    One effect of the tax, especially in the cases where there is a pile of cash sitting in a bank, may be to actually USE the money by spending it, employing it somehow, lending it... and that may be better for the economy than sitting on it.

  • 3

    Virtuoso

    This is appalling. Lowering the bar to 30 million yen constitutes an outrageous attack on Japan's middle class. What this revision will do is result in more elderly widows being booted out on the street. They will have no choice but to sign over their property to predatory banks. Meanwhile the truly wealthy know how to set up all kinds of tax shelters like paper corporations, offshore banking accounts, foundations, etc.

  • 1

    Herve Nmn L'Eisa

    Johannes, you are dead wrong;the state did nothing except already tax and take too much which has been squandered. Your use of the word "state" is reminiscent of the statist-extraordinairre STALIN. Inheritance taxes are pure robbery of the descendants, plundering the family members. Disgusting.

  • 2

    Nessie

    It is not fair in that it is clearly a policy of taxing money that has already been taxed previously

    Sales tax is a policy of taking money that has already been taxed previously twice (business tax, income tax).

    Ditto for capital gains taxes.

    There is nothing at all unusual about multi-taxing.

    Plus, as Cleo and other have explained above, the inheritance tax only kicks in after a high minimum. An inheritance tax is a way of restoring a meritocracy, since meritocracies have a natural tendency to become unmeritocratic (the able perpetuate their advantage by buying privilege for their kids).

  • 1

    japan_cynic

    Virtuoso, there are also massive extra exemptions for the surviving spouse, not mentioned in this article (which only considers inheriting children).

  • 0

    Herve Nmn L'Eisa

    Any inheritance tax is criminal. Meritocracy my foot. Such taxes only further fund government profligacy.

  • -11

    tmarie

    Osaka Mayor Toru Hashimoto has even suggested collecting the entire inheritance so that no wealth is passed onto the next generation.

    Just one more reason to dislike the guy. I bet when he's kids get older, all seven on them, he'll be hoping to leave things behind for them.

  • 1

    donpolski

    People probably don't care because there's a million ways around this sort of idiocy!

  • -7

    tmarie

    Indeed - get your money abroad! I know that is where mine is!

  • 0

    asadullah

    this is simply the law of jungle.follow the islamic law of inheritance.how people accept this is beyond imagination

  • 1

    cactusJack

    I think estate taxes force a lot of people to sell their homes and property to pay the tax, which is not right.

  • -1

    Hikozaemon

    The purpose of inheritance tax in Japan has been basically to redistribute wealth, and it has been very successful at doing that - wiping out the wealthy and aristocratic upper classes, and putting their assets into the pool of national funds that has been use to spread money to poorer regions of Japan and create employment with public works and government projects and subsidies.

    It's essentially the cornerstone of a very successful model of socialism.

    Of course, even taking what they already do, it's not enough to fund all the wasteful spending of government to redistribute wealth, so the government is fixing this problem by increasing the tax take, and adding sales tax increases to it, both of which will impact less wealthy people more.

    It really makes you want to be careful about dying suddenly - the only way to give anything to your kids is going to be figuring out the right timing to transfer everything to them just before you pass away. And it's parasitic of the state to be doing this - but I guess going forward, most of this will be taken from the young families of passed away elderly to pay for remaining elderly to keep enjoying their retirements.

    Doesn't look very bright for kids growing up here in the future.

  • 0

    bruinfan

    "Capital gains tax will also apply when you sell the inherited real estate."

    This is the big "if". If the captital gains basis for inheritance is zero, then this tax could be large.

    Also parents should be able to leave some wealth to their children (and have as an incentive little or no inheritance tax for most people), but it may not be desirable to for them to leave so much that three generations can live without doing a day's work.

  • 0

    cleo

    It really makes you want to be careful about dying suddenly

    Erm, I'd really want to be careful about that anyway. Quite apart from the money.

  • 0

    Dixie Ota

    I think its disgusting that the Japanese Government is taxing at 50% level on wealth inherited from one generation to another. My grandparents worked hard to purchase and payoff a house and just because my father inherited the house should not mean he should pay and inheritance tax. We always amass wealth to leave for our children and grand children. This is theft at its greatest.

  • 1

    Dixie Ota

    This is also not wealth distribution as so many here have seem to argue. The government takes money from you and does not put it back into the economy or give it to the poor. If i pay property tax each year, why does the government need to have an inheritance tax? Its a scheme to keep collecting money even after a person has died. This is not the Japanese way I have known the culture to be. Japanese people need to rise up and fight the government. The Government needs to work for the people no tfor themselves.

  • 0

    Dixie Ota

    Hikozaemon,

    If this is wealth distribution, why then are there still homeless people in Tokyo? Don't delude yourself into thinking this is a means to wipe out the upper class of old Japanese society. If you want a true socialist society, you need to remove the one factor that causes class distinction, MONEY! Those government officials whom you claim are redistributing the wealth more than likely live in a big house, big property, and get paid a alot more than the average government employee. Find out how much of this inheritance tax actually goes back into society. I would be willing to bet not as much as it should be. Find out where this money is going. Does anybody know?

  • -4

    cleo

    I heard an interview with Melinda Gates once in which she said she and Bill intended to leave their kids 'enough to do whatever they want, but not enough for them to be able to do nothing'.

    My grandparents worked hard to purchase and payoff a house and just because my father inherited the house should not mean he should pay and inheritance tax.

    Why not? Your grandparents worked hard to pay for the house and had the benefit of living in it. Your father didn't work for it, for him it's a windfall. If he pays the tax in order to keep the house, he's getting it at a fraction of its true worth; if he sells it to pay the tax, he's still got stacks of money left. If he doesn't want to pay the inheritance tax he can forfeit his claim to the estate.

  • 0

    hilldomain

    Inheritance tax has historically forced younger people to sell the property or most of the property to pay for the taxes. This has caused the division of lots into smaller and smaller lots- and forced a situation of no greenery and congestion. Read Tokyo Metabolism a book that describes this phenomenon. Its really sad. the older architecture is disappearing and scars are made on the once greener landscape. Shows how how desperate politicians are robbing the middle class to raise revenue- and how stupid they are that they fail to see the city planning nightmares they are creating.

  • -1

    hilldomain

    In response to Cleo's comment about the next generation paying for property that was already payed for- that is the stupidest argument I have ever heard. Its not like the father is a stranger. The family is one unit- they worked hard and purchased the land- done. Now its in the family paid for- why keep digging a hole and filling it in and then dig it again. What right does te government have to profit from that land- The family didn't RENT the land from the government- they need to keep their greedy paws off other peoples stuff. Paying tax of any kind on land is absurd. The government didn't work for the land!

  • -1

    hilldomain

    you should be able to give your belongings to anyone you want to - that is the definition of ownership- if the government regulates or taxes this right they are communists!

  • -1

    hilldomain

    Hikozaemon

    Japan is not a socialist nation. its theft pure and simple.

  • -1

    hilldomain

    Im sorry why is it bad for future generations not to have to slave at meaningless work that has no connection to bettering society in the long run? Do you want the world to be filled with more salarymen? we need to work toward a society that has to work less and less to produce crap products and sell things people don't need, and spend more time with more worthy human aspirations like spending time with family, enjoying life, or solving some of the great philosophical problems, or maybe sharing the wealth in philanthropic efforts.

    Seems like many are just jealous and still imagine all people with wealth who don't work as simply lazy and evil. The individual can invest far better than the wasteful government. Government is not good for much and they certainly are poor at handling our money. Look at who they allow to be politicians- Ishihara? really?

  • 0

    hilldomain

    because we all need to pay for all the roads to nowhere.

  • 0

    hilldomain

    Its just a way for government to get payoffs from large real estate companies and banks for doing their bidding- its forces people to sell them their properties so these banks and agencies make a large profit

  • -1

    cleo

    Its not like the father is a stranger. The family is one unit- they worked hard and purchased the land- done.

    True the father is not a stranger; the land your immediate family worked hard to buy most likely falls right through the holes of the Japanese inheritance tax laws, after you factor in all the allowances and deductions. In the example given in the article, the family is not one unit; they are living separately, and the parents' house is not needed as a residence or business property by the heirs. If they want to up their inheritance, maybe they should move in with granny and care for her in her twilight years.

    In your typical filthy-rich family that would get hit hard by inheritance tax, the g-g-g-g-g+αーgrandfather who originally got the land because he did a favour for the lord/sold a daughter/took it by force of arms from some other rich and powerful bully, is basically a stranger. What's the justification for giving a huge windfall to g-g-g-g-g-Junior Who Has Always Been Rich And Never Worked A Day In His LIfe, just because he happens to share (assuming there were no shenanigans along the way) a fraction of less than one percent of his DNA with some ancient bigwig?

  • 0

    hilldomain

    Johannes Weber

    they are entitled to it - its their birth rite- who are you or who is the government to tell me who I can give my bought and paid for property? ITS MINE ILL GIVE IT TO WHOM EVER I WANT! this is insanity- its the very definition of property- then again I am not communist- I am an American and proud of it- we at least try to protect our property from theft- I think the best thing to do is build a great security system around the property, surveillance and and few Gatling guns on the roof, a and a rocket launcher. Come and get it if youve got the balls.

    or dont buy property just do what the yakuza do and move in- in fact I think I am beginning to understand and agree with many yakuza policies.

    all you are doing is forcing people to hide their money.

  • 0

    cleo

    its their birth rite- who are you or who is the government to tell me who I can give my bought and paid for property?

    Do the sums. No one is taking land that is 'bought and paid for' from anyone. There's a huge difference between passing on to your kids what you earned by the sweat of your brow, and passing on what was simply passed on to you, no effort involved.

  • -1

    lucabrasi

    @ hilldomain

    "birth rite", like ritually cutting the umbilical cord? All very weird, my friend. I agree with Cleo.

  • 0

    snafrey

    Helo, I live in Dubai, I was told by one of my friends that, in Japan, upon a persons death all his wealth (liquid assets/cash etc) is taken by the Govt. except for a small percentage which is given to his children. This sounds really strange and I will appreciate if someone can please correct me, in brief with just the major provisions of law of inheritance. Thanks !

Login to leave a comment

OR

More in Opinions

View all

View all