Revisions to the Inheritance Tax in Japan and Implications for Real Estate Transactions
Editor’s Note: 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.
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 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.
A-san’s mother has passed away. She was living in a house on a 200 sqm 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.
Inheritance Tax Rates:
|Base of Taxation||Tax Rate||Deduction|
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.
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)
Photo credit: hashi photo via Wikimedia Commons
Charts: Courtesy of Zoe Ward