Advice sought regarding inheritance tax, UK version

[danny15]

Hi all, and thank you in advance for any advice. Firstly, I should say that I do plan to speak with an English speaking tax accountant later in this month.

But before I speak with the accountant, I was hoping that I could pick up some advice here, because I am beggining to worry. Here is my situation:

- I am from the UK, and my mother passed away 12 months ago
- I have been in Japan for 15 years and am a permanent resident
- My sister and I automatically inherited her estate between us 50/50. Her estate consists of her house, which we are currently trying to sell
- The first payment of inheritance tax has been paid in the UK, the remainder can be paid when the house is sold. We hope to sell the house ASAP, but the housing market is quite slow currently
- The house should be sold for around £1.4 million. Therefore after all UK taxes deducted, all costs etc etc, perhaps myself and my sister will receive around £500k each
- Fortunately I still have a UK bank account, where the money can be paid into

So that is my summary without going into too much detail.

Why am I worried? I just read this online (from the website of a financial services firm called Argentum) regarding on inhertance tax that I might also have to pay in Japan:

"Inheritance tax should be paid to the National Tax Agency within ten months of the decedent’s death, not when the inheritance was received. Failure to pay at this stipulated time attracts stiff penalties with the punishment ranging from fines to imprisonment."

I had no idea about this until very recently, and my mother passed away more than 10 months ago. So I am already in major trouble?

Thanks for listening, and like I said, thank you for any advice

[beanhead]

Some useful info here:

https://www.reddit.com/r/JapanFinance/c ... oreigners/

[Tkydon]

.

[danny15]

Thank you so much for going to the trouble of explaining everything you did, I am extremely grateful! So from what you've said, there's a good chance that I wont have to pay any further inheritance taxes in Japan, correct?

Are you an accountant by any chance?

[ClearAsMud]

I had no idea about this until very recently, and my mother passed away more than 10 months ago. So I am already in major trouble?

No, you're not in major trouble. You might incur a late fee.

Nobody gets thrown into jail for non-willful late filing, but the 10-month deadline is firm, with only very limited exceptions. Three penalties are imposed for filing a late inheritance-tax return (excluding fraud): 1) a non-filing penalty; 2) a late-payment-of-tax penalty; and 3) loss of eligibility for a number of special inheritance-tax deductions.

Quite a few commercial websites discuss late filing. One I found helpful is this one, which gives the following details:

1) The non-filing penalty, which may be waived if a reasonable explanation can be provided, is 5% of the tax due if the taxpayer files voluntarily before being contacted by the tax office; 10% of the tax due up to a total tax of 500,000 yen and 15% of any tax due beyond that amount if the return is filed voluntarily after receiving a preliminary inquiry from the tax office; or 15% the tax due up to a total tax of 500,000 yen and 20% of any tax due beyond that amount if the return is filed only after an audit is conducted.

2) The late-payment penalty is basically 7.3% of the tax due if the tax is paid within the first two months of the original deadline, or 14.6% of the tax due if paid after that. Lower rates were in effect in 2022, but I don't know if they would apply in your case.

3) The two major deductions for which eligibility is lost are the special deduction for spouses (a very large amount, but fortunately not applicable in your case) and the special deduction for inherited residential land, which possibly applied to you if the plot wasn't big, and the loss of which, if it did apply, might be painful.

As has been noted, you should be able to deduct UK taxes from Japanese inheritance tax if it is imposed, but you really need an experienced professional to help you navigate this situation.

[Beaglehound]

One would hope the tax folk would take a sympathetic view of this if you front up and explain the situation. One might also hope that the house not having been sold yet would be a mitigating factor in not paying the tax on time.

[captainspoke]

I'm not sure of this, but something to check on is if the house can be claimed as a depreciated asset.

I recently read that here in japan at least, if you buy a house for (e.g.) ¥25 million, and sell it later for (e.g.) ¥23 million, it can still be counted as a gain, since (if enough time having passed) the house would have depreciated to something below that ¥23 million.

The situation with domestic and foreign real estate has changed in the last couple few years, so this could either be accurate, or it may not apply to foreign property. (At least as an investment, you can no longer claim depreciation, as could be done up to a couple years ago.)

Look here, and scroll down to Taxes, and then within that section, Inheritance Tax. Also, there are some very knowledgable people on that forum, so if you post this same situation there, I'm sure you'll get some feedback. And of course there is a wiki page for retirejapan, too.

**

And, please, please, please, do not read or put any faith in what Argentum says. Don't go near that outfit for any reason whatsoever.

[ClearAsMud]

I don't know what requirements are in place for inheriting investment properties, but as far as the decedent's personal residence is concerned, the value is determined as of the date of death and doesn't depend on whether the house has been sold or not -- indeed, it could hardly have been sold at the time -- or whether the property has depreciated in value over time. Moreover, to take advantage of the special property-tax deduction, the (statutory) heir must normally have taken possession of and be living in the house at the time the inheritance-tax return was due (spouses are excepted from this requirement).

Note that the 10-month deadline is not just for filing a return but also for actually paying the tax or for obtaining a two-month extension due to special circumstances. This period may be further extended if a natural disaster is involved, but the NTA determines which disasters qualify. The simple fact that the decedent was a foreign national and the assets are located overseas does not constitute grounds for extending the 10-month deadline. If circumstances do not allow a complete and accurate return to be filed by the deadline, the advice universally given to avoid penalties is to file a return (未分割申告) that can be amended within three years to claim any refund due on excess tax paid.

Of course, if no inheritance tax is due in the first place, penalties based on the amount of tax due have no effect, and when one of the statutory heirs is a non-Japanese national living overseas, the reported value of the estate will usually be smaller for the Japan-resident heir, who can apparently also take advantage of the entire basic deduction (although that heir is also responsible for all Japan-based tax). Deferring payment of inheritance tax, or paying by installments, is also possible. But these complications are why professional advice is usually necessary when a large overseas estate is involved, and why comments here and elsewhere can only be regarded as potentially useful information rather than as necessarily relevant to your own situation.

[robster]

I'm curious to know how one could file within 10 months if one has not yet been informed of, or received any of, one's inheritance.
My father passed away 24 months ago but the estate is still in probate and although I have had informal (verbal) notification from the executor of a ballpark figure I don't actually know the amount of my inheritance ...
I'm fairly sure I will be under the exemption so it's probably not an issue, but how would this be resolved if it were over the exemption limit?

[ClearAsMud]

The basic rules governing Japanese inheritance tax come from knowing the overall value of the estate and the number of statutory heirs rather than from the contents of a will or the question of who actually gets what. As long as a value can be attached to the assets at the time of death -- even if it is an estimated value -- and the number of statutory heirs can be determined, a tentative return can be filed. If the actual division of assets turns out to be different from the statutory division or if the estimated value of the estate has been over- or understated, an amended return is filed and a refund claimed or additional taxes and penalties are imposed. Late returns (and filing an inheritance-tax return itself is the exception rather than the rule in Japan) are likely to attract penalties and can result in the loss of valuable deductions.

There is no way to squeeze blood from a turnip, so if inheritance tax is due and the taxpayer doesn't have funds or property to cover it, no doubt some sort of accommodation is reached -- delayed payment or installments, for example (I'm not enough of a tax otaku to go searching for cases). The NTA will normally be happy as long as it gets its money. Because overseas probate takes time, the advice given on Japanese sites is to try to avoid it by setting up living trusts and the like, making timely filing of a Japanese return easier. Otherwise, you file a 未分割申告 -- which is based on statutory inheritance shares and cannot incorporate special deductions, so you attach a statement that preserves your right to claim some of them for an additional three years--and resign yourself to filing a second, amended return later. If the estate is worth more than the basic deduction and a surviving spouse is involved, you really, really want to have even a tentative return filed by the deadline.

Dealing with such complications is precisely how tax professionals make their living. I don't know about you, but I wouldn't feel confident about inheriting part of a large overseas estate without paying for professional advice, as economically painful as that might be.