Inheritance planning question

[Gareth]

Can’t help thinking inheritance planning is a bit of a dark topic emotionally but I suppose it makes perfect sense financially.

Firstly, could I just confirm my understanding of inheritance.

When my mother dies, my brother and I will inherit the house. We won’t need to pay inheritance tax because the house isn’t worth enough when both the U.K. and Japan’s inheritance laws kick in. I already know this. But if I understand correctly, when we sell the house, capital gains tax for me in Japan will be calculated from when mum bought the house to the point when we sell it. Is that right?

Secondly, my question is, what happens in the following case? My mother passes on, the house goes to her husband (not my father). Then he passes and the house comes to my brother and I. Will the capital gains tax then be calculated from the point when my mum bought the house or the point when her husband got the house after her passing?

Thirdly, if we get the house and then decide to rent it out rather than selling it, of course the income will be taxed as income. But if we do that for ten years and then sell the house, what’s the “start point” of the capital gains tax calculation?

Thanks!

[Wales4rugbyWC23]

First things first, talk to your mum about what is in her will and work from there in relation to inheritance tax. Of course, you will have to ask your mum about what the position is of her husband. It is a difficult conversation but don't put it off, it's not morbid either.

[Tkydon]

You should consult with a professional.

Can’t help thinking inheritance planning is a bit of a dark topic emotionally but I suppose it makes perfect sense financially.

Firstly, could I just confirm my understanding of inheritance.

When my mother dies, my brother and I will inherit the house. We won’t need to pay inheritance tax because the house isn’t worth enough when both the U.K. and Japan’s inheritance laws kick in. I already know this. But if I understand correctly, when we sell the house, capital gains tax for me in Japan will be calculated from when mum bought the house to the point when we sell it. Is that right?

If the total value of the portion of the estate inherited by Japanese residents (you) is less than Y30M + Y6M x No. of Statutory Heirs (in this case 3; Spouse and 2 kids) = Y48M, then there will be no Inheritance Tax due in Japan. If the value inherited by Japanese residents (you) is greater than Y48M, then you will be liable for Inheritance tax on the amount in excess of Y48M, but will be able to claim your share of any Estate Tax paid in the UK as a Foreign Tax Credit.

You inherit the Tax Basis which is the Purchase Price when your mother bought the house x GBPJPY Exchange rate on the date when the house was purchased.

Secondly, my question is, what happens in the following case? My mother passes on, the house goes to her husband (not my father). Then he passes and the house comes to my brother and I. Will the capital gains tax then be calculated from the point when my mum bought the house or the point when her husband got the house after her passing?

If your mother leaves the house to your step-father, and then your step-father leaves the property to you,
You and your brother are not Statutory Heirs, unless your were formally adopted by your step father.
Do you have any half-siblings; children of your step father with your mother? Or step-siblings; children of your step father with a different mother?
If the total value of the portion of the estate inherited by Japanese residents (you) is less than Y30M + Y6M x No. of Statutory Heirs (in this case this may be 0) = Y30M, then there will be no Inheritance Tax due in Japan.
However, if the value of the portion of the estate inherited by Japanese residents (you) is greater than Y30M, then you will be liable for Inheritance tax on the amount in excess of Y30M, AND as you are not directly related by blood to your step father (unless you were formally adopted), the amount of tax calculated will be liable for the Non-Direct Relative 20% Surtax. (Multiply the amount of calculated tax by 1.2).

Say at that point, you and your brother each own 50% of the property.
If the property is then sold, you will then be liable for Capital Gains Tax on your share of the Capital Gain.
The Capital Gain will be calculated as
(GBP Selling Price x GBPJPY Exchange Rate on the day of Sale
minus Selling Costs in JPY
minus the Tax Basis (GBP Purchase Price x GBPJPY Exchange Rate on the day of Purchase) )
divided by 2 (your 50%)

It depends how quickly you sell, how much of a tax deduction you will get against that Capital Gain Amount

The Capital Gains Tax will be calculated on that JPY Value after the Capital Gain Allowance.

https://www.nta.go.jp/taxes/shiraberu/t ... o/3306.htm
There is a Special Akiya Prevention Capital Gain Deduction of Y30M against your Capital Gain if you sold within 3 years.
This has been extended to 31-Dec-2027, but I do not know if this will be extended in the future.
The property cannot have been rented out or used for commercial purposes in the meantime.

Thirdly, if we get the house and then decide to rent it out rather than selling it, of course the income will be taxed as income. But if we do that for ten years and then sell the house, what’s the “start point” of the capital gains tax calculation?
Thanks!

The Tax Basis is inherited with the property, so the equation above still holds, but you would not get the Akiya Prevention Capital Gain Deduction (disqualified; too long after inheriting, and rented out). You would only get a deduction of Y500,000 against your portion of the Capital Gain.

[Tkydon]

If you haven't already, see this thread:

https://www.retirejapan.com/forum/viewtopic.php?t=3017