Not as bad as I thought
We’ve talked about inheritance tax in Japan before. The TL;DR is that they are not as onerous as people think and most people are not really going to be affected by them.
This week I learned that Japanese inheritance tax on overseas inheritances is much more favourable than I had thought, so I wanted to share the good news with you.
How it works in Japan
The first thing is that you must declare any inheritances to the tax office within ten months of finding out about them.
The total value of the estate is calculated. The standard deduction is subtracted from the value. The standard deduction is 30m yen plus 6m per legal heir (these are family members as described in tax law). Liabilities are also deducted, as is tax-exempt property, etc.
Then the taxable estate is divided across the heirs. The total amount of inheritance tax due is calculated, then divided proportionally among the heirs. Each heir pays their share (there are further allowances for spouses, etc.).
How it works with overseas inheritances
Now, my understanding was that overseas inheritances were treated the same way. Remember, if you are on a working visa and you have been in Japan for less than ten years, you do not have to declare or pay tax on overseas inheritances.
If you are on a spouse visa, are a permanent resident, or have lived here for more than ten years you do have to declare and pay tax.
However, I learned this week that Japan does not look at the entire value of the estate when deciding taxes (as I erroneously thought previously). Instead, they only look at the portion of the estate inherited by the Japan-resident taxpayer. The entire 30m yen + 6m yen per heir tax-free allowance is then applied to that portion of the estate, massively reducing the tax burden compared to an inheritance in Japan.
This information was provided by the legendary u/starkimpossibility on the r/JapanFinance subreddit. They referenced the National Tax Agency (NTA) website as well as this page about inheritance tax in special cases, in particular non-Japanese or people living outside Japan, written by a Japanese accounting firm.
As always you should consult a tax professional or the tax office to get accurate information, but this seems to be very good news for anyone who might receive an overseas inheritance while living in Japan.
Are you absolutely certain? This is contrary to advice which I have received in the past that was aligned with your previous understanding.
I’m not a tax professional, but the links seem to check out and I haven’t seen u/starkimpossibility be completely wrong about something before. Obviously you would have to confirm with the tax office when filing the paperwork.
Where did you get the contrary advice from?
Thanks for your quick response. My own Japanese tax adviser with whom I am double-checking again now.
I can imagine a normal tax accountant here not necessarily being familiar with overseas inheritance rules… let us know what they say!
Thanks for the article. I’m not so sure. My mother died in 2014 and we went through a Japanese accountant for the inheritance tax due. Luckily I planned well in advance and didn’t have any issue, but only as I planned 10 years in advance. By the way a will made
in Japan would superceed any default legal split of heirs. It’s complicated….
I would imagine not all Japanese accountants would be familiar with the rules on overseas inheritances (likely also not all tax officers!). Being able to bring up this section of the tax code would be helpful in asking the right questions methinks.
Actually my accountant is in the International Division of a Roppongi firm with a lot of famous and undoubtedly well off clients. For sure they are very well aware of International tax 🙂
I’m not quite understanding your point here. Did this accountant tell you that inheritance tax was applied to the entire overseas estate before calculating the Japanese resident’s tax, or that it was only applied to the portion inherited by the Japanese resident? Because that is the content of the blog post that you are ‘not so sure’ about.
Can you link the thread? Somehow I’m not finding it.
The Reddit thread? There were two or three different ones (all in r/JapanFinance).
This is consistent with what I was told last year by a mid-tier accounting firm when dealing with my mothers estate. The only difference i see is that I was advised there is no requirement to submit an inheritance tax return if there’s no tax payable. However, I was strongly advised to do so to avoid “difficult questions” from tax authorities in the future if/when repatriating funds back to Japan, and declaring income from any investments I might make overseas with those inherited funds.
I was also advised that a will is meaningless for the calculation of the estate tax. The tax is levied on the estate and deductions calculated based on the legal heirs. The tax bill is then technically split amongst the legal heirs in reality I would assume, but if someone left everything to one heir in their will, that doesn’t change the amount of estate tax payable. In fact, a will can trigger gift tax separately, as I learned. If the estate is left to non-legal heirs (such as my wife, for example), then that CAN be considered a separate gift from me to my wife subject to Japanese gift tax, which is prohibitive. In my case, my mothers Will allowed for a testamentary trust to be set up for the benefit of myself and any other family I chose to nominate, eg, my wife and children. If I’d gone ahead and set up the testamentary trust (very attractive for tax reasons in Australia!) I would have gifted 1/4 of my inheritance to each of my wife and kids, and the Japanese government would have levied gift tax on it. I believe there may be ways to counter this with some very good and explicit planning, but my advisors also noted that the NTA don’t understand trusts as they’re used in Australia, and presumably other parts of the world, so they treat them like they are an extension of the individual heir and tax them accordingly. Definitely worth planning ahead if you can.
The other thing to note; tax laws change. What was correct 10 years ago (or even last year) may no longer be correct, so it’s always worth getting some advice.
Thanks! Nice to hear this appears to be correct as it’s very different to how I thought things worked.
This only make sense. How would the Japanese government even know I inherited anything unless I declare it. If my parents leave us 3 kids $900,000 (for example) split 3 ways my inheritance is only $300,000. I never take possession of any other money so why would I even mention the $900,000? Assuming a simple estate. I can see where a more complex estate might make it appear that the Japanese resident got the full $900,000 to distribute to others which could make the full amount taxable or something. I’d just be sure the Japanese resident is an executor. I have also read that US style trusts can cause issues as they might not be recognized by foreign governments in the same way as the US.
I meant to say that the Japanese resident is NOT an executor.
A good rule of thumb that was told to me is that Japanese tax authorities will simply ignore trusts (they do not use the concept here) and assume the beneficiary has received the full amount on creation of the trust (which can be a nightmare as you may owe tax on an amount you cannot legally access).
I am confused but maybe understanding it a little bit.
My father passed away right before the big covid pandemic. Me and my two sisters equally split the estate (it wasn’t much of an estate but so be it)– basically getting around $130,000 each. The total was around $500,000 but there were of course other deductions/expenses.
So, if I’m understanding it, the tax people here in Japan will think I got the entire $500,000? I have a breakdown from the lawyers which clearly lists all the expenses and so on and the exact amount that I received. But according to Mr. Tanaka this is actually not the case and they would recognize that I only received $130,000?
According to Jim it is possible that I may not even have to declare it because it falls well under the 30 million yen deduction. Of course, I would rather just declare it even if I don’t owe any tax but am a bit concerned about having to deal with any misunderstandings if the tax people don’t know the law and so on and think I owe a lot of tax (“opening up a can of worms”, so to speak).
So my main question is, which is going to sound selfish and lazy, is it better for me to just not do anything unless someone from the tax office actually finds out about it somehow (the funds are in the U.S. and I don’t plan on transferring anything to Japan)? In a sense just “play dumb” and say I was unaware I had to do anything (it’s not like I received an English guide book in the post explaining the tax laws here).
Thank you.
Sorry to hear about your loss.
Either way you are not on the hook for taxes on $500k.
If what I used to think is true, you would take the estate, deduct allowed expenses, apply the tax-free deduction (30m+6m per heir) which seems like it would give you 48m tax free. $500k is about 55m, so your worst case scenario is that 7m of the estate is taxable at 10%, so 700k yen. Your share would be a third of that so 230k yen or so.
If this new information is true, then the full tax-free allowance of 48m would be applied to your share of the estate (around 18m yen) leaving you with no tax liability.
Checking with the tax office/doing a return would give you peace of mind in case you got audited or asked about moving the money to Japan.
Let us know if you get any new information!
Thank you for the reply.
If I go to the tax office it probably won’t be until August when I have some days off. I’ll let you know what happened.
Do you think they will ask me for anything difficult to get? Or just take my word for everything (plus the one document I already have)? Everything concerning the estate is finished. It would be a hassle to have to obtain some kind of additional paperwork from the lawyers, for example.
My main concern is that 1) I’ll go there and they won’t know what I’m talking about or 2) mistakenly charge me an arm and a leg.
I am not a tax professional and this is not advice.
The NTA website says that you do not have to do anything if the amount of the inheritance is less than the tax-free allowance: https://www.nta.go.jp/english/taxes/others/02/15001.htm
It also says you are also obliged to declare the inheritance within ten months of being notified of the death of the estate holder.
You must make your decision on what to do based on those two pieces of information from the Japanese tax authorities I think.
Thanks for the information.
I will look into it further before deciding what to do. Even though the information is in English it would be nice if it were clearer. Ha ha.