Early inheritance taxation

[Azrael]

Hi all

I have a question regarding receiving early inheritance and the tax implications. Looking through the very useful blogs on here, I understand the implications for long term residents receiving inheritance from a lineal relative upon their death i.e. inheritance tax (sōzokuzei) in Japan is a tax paid by someone who inherits money or property from someone who has died. In Japan, it is paid as a national tax (between 10 and 55% after an exemption of ¥30 million + ¥6 million per heir is deducted from the estate).

What I am not clear about is the process for dealing with receiving early inheritance from a lineal relative (i.e. they are still alive) vs gift tax. My understanding is that, as long as the relative is over 60 and you are over 20, 'special rules' apply as outlined here (https://www.nta.go.jp/english/taxes/others/02/15003.htm). Under this system, you are exempt for the first Y20 million and then pay 20% on anything over this (as opposed to the standard Y1.1 million basic exemption for standard gift tax). But you still need to file this because any future inheritance you receive from this relation is subject to these slightly different rules instead of the normal inheritance system?

Does anyone have any experience of receiving early inheritance and filing under "No.15003 - Selecting taxation system for settlement at the time of inheritance" (as it is referred to on the website) as it isn't totally clear to me. Any ideas what this is called in Japanese?

Thanks very much guys and apologies if this has been answered elsewhere but I couldn't find anything specifically on this!

[ClearAsMud]

The name in Japanese is "souzokuji seisan kazei no sentaku" (相続時精算課税の選択 election to pay tax at the time of inheritance).

The equivalent Japanese page to the one you refer to is here: https://www.nta.go.jp/taxes/shiraberu/t ... u/4103.htm

The maximum exclusion is 25 million yen rather than 20 million yen, but otherwise you have described the basic points accurately enough. It is technically regarded as a gift, so a form on which you make the election (相続時精算課税選択届出書) is filed as part of a regular gift-tax return that also includes the form specific to this type of gift, along with documentation of the relationship between donor and recipient.

The election form can be downloaded here:

https://www.nta.go.jp/taxes/tetsuzuki/s ... pdf/27.pdf

The relevant gift-tax forms are here (the first is the main form, the second is the form for this particular type of gift):

https://www.nta.go.jp/taxes/tetsuzuki/s ... df/001.pdf

https://www.nta.go.jp/taxes/tetsuzuki/s ... df/006.pdf

The purpose, as you note, is so the tax office can keep track of the gifts and include them in the donor's estate. When the time comes, the inheritance is taxed as if the total amount gifted -- cash, real estate, or whatever -- still belonged to the donor at the time of death, and the recipient is the one responsible for paying any inheritance tax on the amount received.

A quick summary of the considerations involved:

• The main advantage is, of course, transferring a large sum to a presumptive heir during the lifetime of the donor. It's sort of like writing a preemptive will: the property is guaranteed to go to the person the donor wants it to go to, only the transfer takes place in the here and now. The estate itself receives no tax benefit, but the taxable amount of the gift is regarded as the value at the time the gift was made, so if the asset appreciates before the donor's death, the recipient can benefit financially.
• Both parents (or grandparents) can make the election separately (e.g., the parents can each gift a child 25 million yen tax free, as long as each has the resources to to do).
• On the minus side, all further gifts to the same descendant by the same donor must be reported according to the same procedure: the recipient may no longer make use of the annual 1.1 million yen exclusion for any gifts received from that particular donor. In other words, even a gift of, say, 50,000 yen would be subject to tax reporting. Once gifts reach the 25 million yen mark under this exclusion, a flat tax of 20% is imposed. However, there is no limit on the number, type, or value of such gifts, so depending on circumstances, the lower tax rate as compared against straightforward gifts might actually work to the recipient's advantage.
• If, at the time the estate is settled, the estate comes in under the taxable amount, no tax is due on the gifted amount. If the estate exceeds the tax-free amount, the recipient can apply any gift-tax payments to settling the inheritance tax or, if applicable, apply for a tax refund.
• If the gift takes the form of real estate, the recipient cannot take advantage of the generous deductions and exclusions available with respect to inheritance tax. A donor should consider carefully whether gifting real estate is the best choice financially.
• The relationship between donor and recipient is normally documented by submitting official copies of the family register. If you are not on the family register, documentation could get a bit tricky and you should look into how that might be done.

Filing the return is actually pretty simple if it's cash that's being gifted (by bank transfer, that is -- never gift large amounts of actual cash). But the exclusion should probably not be considered a very effective strategy for avoiding inheritance tax.

[Azrael]

ClearAsMud thank you so much for this amazingly detailed reply! I really appreciate it as have struggled to find a tax advisor that would help clarify these points and the tax agency were useless.

Can I just ask you something else please? Just to confirm on inheritance tax - it has to come from a lineal relation, otherwise its subject to gift tax rules? So, for example, if an uncle or aunt were to give you money it would be taxable on anything over 1.1 million yen?

Thanks very much again!

[ClearAsMud]

Correct -- with two specific exceptions, donors can only be parents or grandparents (adoptive parents are also included).

The exceptions involve passing on control of business assets to a designated successor, in which case consanguinity is not necessarily a requirement. But if that is what you are thinking about, you will need the help of a qualified tax professional and shouldn't rely on general advice (least of all from me).

[Azrael]

Thanks again for all your help ClearAsMud. Very much appreciated!