Advice sought regarding inheritance tax, UK version

[robster]

Thanks for the explanation @clearasmud.
My share will, as expected, be under the basic exemption and therefore no filing obligations.
It's a tricky issue, and one that I expect many forum members will encounter at some stage.

[northSaver]

A stupid question maybe, but do we have to notify the NTA of an inheritance even if we think no tax is due? Or do we only notify them (file a return) if we think tax is due? I'm guessing the latter, but that would assume that all inheritors had a good grasp of the tax law. So maybe we have to tell them anyway and let them decide?

[dgbg]

Sorry - I didn't check your previous post on my thread asking basically the same questions.
Please get in touch: dougglug@gmail.com
I'd be happy to help.

[kuma]

This is one of several interesting threads on transnational IHT.

I have a few questions to add to the mix to improve my understanding:

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).

Does anyone have a reference which supports this (potentially) key point for many of us foreigners? (Apols if ground already well covered; just want to be absolutely sure, as a lot of material is geared to domestic inheritance, and a lot of material descends into legalese pretty swiftly.)

I suppose some common cases would include:

1. decedent and estate overseas. 1 beneficiary in Japan and liable for Japanese IHT. Does the beneficiary get the full 30million basic deduction? And is this deduction on his share of the inheritance, ie the portion of the estate relevant for/visible to Japanese tax authorities?

2. as above, but the beneficiary is a statutory heir, so the Japanese tax-free allowance is increased by 6m. Again, is it correct that this 36m deduction would apply to just the beneficiary's inheritance, which is the 'estate' visible to Japanese tax authorities?

3. as above, but in addition to the beneficiary being a statutory heir, there is a second statutory heir who is not resident in Japan / relevant for Japanese taxes (for example, death of a parent; estate divided between two children; one of whom is resident in Japan and the other of whom is not). Since much of the primary source material on IHT does not consider transnational inheritance, it points towards identifying all statutory heirs and applying the relevant deductions. But in this case, since only 1 statutory heir's portion of inheritance is visible to the Japanese tax authorities, is my understanding correct that deductions of 30m (basic) + 6m (1 statutory heir) would apply?

[ClearAsMud]

Does anyone have a reference which supports this (potentially) key point for many of us foreigners? (Apols if ground already well covered; just want to be absolutely sure, as a lot of material is geared to domestic inheritance, and a lot of material descends into legalese pretty swiftly.)

There's no way to get around legalese if you really want to be sure about things, but your questions all seem to concern the basic inheritance-tax deduction, which is available to every inherited estate and is calculated very simply: 30 million yen plus 6 million yen times the number of statutory heirs. The residential status of the statutory heirs is irrelevant, as is the actual distribution of inherited assets.

This basic deduction is subtracted from the value of the estate, which in the case of transnational inheritance will have been determined by considering the residence status and citizenship of both decedent and heir. This is where things can get tricky, so non-NTA sites like this one often provide a table to help visualize the possibilities (the RetireWiki has an English-language version of such a table). The main point to be made is that only the overseas assets inherited by "unlimited" taxpayers are subject to inheritance tax to begin with; assets inherited by "limited" taxpayers don't enter into the picture. Thus, the assets inherited by the "unlimited" taxpayer(s) constitute the value of the estate for inheritance tax purposes, and subtracting the basic deduction from that amount yields the taxable value of the estate.

The next step is to calculate the initial value of the inheritance tax based on statutory distributive shares, thus also involving all statutory heirs (except those who relinquish their right to an inheritance). As before, the residential status of the statutory heirs is irrelevant. This calculation produces the actual tax burden, and because marginal rates apply, the combined tax for two statutory heirs, for example, may well be be less than the tax on the same amount inherited by a single statutory heir. Finally, the tax is apportioned according to the actual distribution of the reported assets, and since only the "unlimited" taxpayers actually receive those assets, they will be the ones responsible for paying the entire tax bill (assuming that one exists).

Such is my understanding, anyway, simplified and generalized as it is (I haven't been through the process myself). It's possible I've missed something, and perhaps more knowledgeable comment is forthcoming. There are, moreover, any number of situations that might complicate matters (wills, overseas probate, inheriting foreign real estate, the applicability of various special deductions, the need to document the legal status of statutory heirs, the issue of whether an heir has Japanese citizenship), likely making obtaining professional help necessary. But as far as the basic deduction goes, the formula is simple and applies to the objectively determined (=visible) value of every estate.

Additional concrete references aren't easy to come by, but a good place to start is the relevant threads over on the Japan Finance Subreddit , including those under this flair. The wiki there also contains links to some helpful examples.

[northSaver]

The main point to be made is that only the overseas assets inherited by "unlimited" taxpayers are subject to inheritance tax to begin with; assets inherited by "limited" taxpayers don't enter into the picture. Thus, the assets inherited by the "unlimited" taxpayer(s) constitute the value of the estate for inheritance tax purposes, and subtracting the basic deduction from that amount yields the taxable value of the estate.

Just to be absolutely clear regarding the meaning of overseas assets inherited by "unlimited" taxpayers:

If the overseas inheritance is to be shared equally between two children of the deceased, one resident in Japan and one not, then the amount inherited by the "unlimited" taxpayer (i.e. the one living in Japan) is 50% of the total value of the estate?

If so, it seems weird that we are allowed to deduct the non-resident's allowance (600 man) from this amount, since the value we are working with doesn't include their share! I wonder why the tax office are depriving themselves of tax in this way?

[kuma]

@CAM, thanks for the considered response and the links.

your questions all seem to concern the basic inheritance-tax deduction

Initial questions, yes Initial forays into understanding transnational inheritance!

Assuming I've understood correctly, your answers confirm that the determination of basic deduction is both simple and potentially favourable to transnational inheritances. 

A. Lots of statutory heirs? Higher basic deduction (than if fewer heirs existed).
B. Only a portion of the estate 'visible' to Japanese tax authorities? Basic deduction (including the bit based on number of heirs) still applies, even on a portion of the overall estate, and even when not all of the heirs have Japanese tax obligations.

In A, the whole picture (ie entire cast of statutory heirs) is considered, irrespective of J tax obligations.
In B, a partial picture (ie estate visible to J tax authorities) is considered.

Interesting consequences (as northsaver comments).

In an extreme case:

Overseas decedent. (No ties to Japan; all assets overseas.)
Estate value 1,000m (10 oku). 
10 statutory heirs; equal split (100m = 1 oku each).
Only 1 heir with J tax obligations.
Basic deduction of 30m + 10 x 6m = 90m J tax due on 10m, but probable that foreign tax credits would cover the bill.
Thus, minimal or no J IHT actually paid on 1 oku inheritance.

Presumably rare to have 10 statutory heirs. Less rare to have 4:

Overseas decedent. (No ties to Japan; all assets overseas.)
Estate value 200m (2 oku). 
4 statutory heirs; equal split (50m).
Only 1 heir with J tax obligations.
Basic deduction of 30m + 4 x 6m = 54m
50m inheritance entirely free of J tax (and indeed reporting requirements?).

In both of the above cases, substantial portions of the basic deductions are due to heirs with no visibility to J tax authorities. Well, to qualify, they are 'visible' for the calculation of the basic deduction, then slip back into the ether.

I think the wiki, r/Japanfinance and this forum are great resources. 

I think IHT is complicated. Especially transnational inheritance. The IHT wiki article was one of my first ports of call.

As one discussion on reddit revealed, siblings (/other cases of multiple statutory heirs of the same ranking) can have quite an effect on Japanese and transnational IHT.

Thanks again for answers.

[ClearAsMud]

If the overseas inheritance is to be shared equally between two children of the deceased, one resident in Japan and one not, then the amount inherited by the "unlimited" taxpayer (i.e. the one living in Japan) is 50% of the total value of the estate?

Again with the caveat that I may well be off, I think the bureaucratically correct way of putting it is that the "unlimited" taxpayer in your two-sibling example is in fact inheriting 100% of the value of the estate of interest to the tax office.

If so, it seems weird that we are allowed to deduct the non-resident's allowance (600 man) from this amount, since the value we are working with doesn't include their share! I wonder why the tax office are depriving themselves of tax in this way?

Concerning this particular point, the basic deduction is probably best regarded as a collective right rather than as the right of an individual statutory heir. As a result, even statutory heirs who relinquish their claim to an inheritance -- and so get excluded from the tax calculation -- are nonetheless included when figuring the basic deduction. Relationships between spouses and among blood relatives (including adoptive relationships) are paramount in Japan (this is why there are family registers, after all). Interfering with the familial rights attendant on such relationships is essentially a nonstarter -- a much bigger deal than simply reducing the overall basic deduction (which has in fact recently been done) or perhaps recasting it completely.

The current somewhat convoluted arrangement -- involving the concepts of statutory heirs and statutory inheritance shares as well as domicile -- is what makes possible an accommodation between residence-based taxation and the proprietary claims of close relatives (it also, not incidentally, makes possible the calculation and imposition of inheritance tax without the need for wills or probate, opening a different can of worms).

[northSaver]

Thank you for the clarifications CAM. Yes, that makes more sense. And let's not forget that any IHT the tax office is "depriving themselves off" (my words, not yours) will probably be compensated by CGT on inherited overseas property

[Gareth]

Lots of great answers and info on this. Thanks to all!

One further question:

Are there any complications if you receive inheritance from two (or more) deceased folk in the same tax year?

Let’s say you get two lots of inheritance that, by themselves don’t go over the limit, but when added together they do go over the limit.

I presume it doesn’t work like that and that one lot of inheritance has no tax bearing on another, but thought it pertinent to check. Can anyone clarify this?