U.K. Discretionary Gift Trust & Japansese Gift / Inheritance Tax

[kuma]

As far as I'm aware, as the benficiary of the fund, I am not considered to be the owner of that money right now. (Is that correct?) I could keep the fund ticking over and inherit it (U.K.) tax free when that time comes. But I would of course be liable for Japanese inheritance tax on it

I don't think you would inherit the trust assets on your father's death, unless some unusual stipulations have been written into the deed of trust. Currently, you are a discretionary beneficiary. Your father and sister are trustees. Your father is the settlor, ie the individual who established the trust and provided the initial funds. Trusts and taxes: Overview - GOV.UK states that the trustees own the assets, but perhaps it is more useful to think of the trust as the owner and the trustees as the custodians or managers. The trust ordinarily survives the death of a trustee. Sometimes a replacement trustee is necessary depending on the minimum number of trustees required (which may vary between types of trust?). Such a trust would not ordinarily be an inheritable asset in my understanding. That's why trusts work for avoidance of UK IHT -- a settlor establishes a trust, which is outside his estate (as the assets are no longer owned by him), and so upon his death, provided the 7yr hurdle has been cleared, the trust attracts no IHT. So in summary, a distribution is likely to be a gift rather than inheritance, and by my understanding this would hold true in Japan too.

[Deep Blue]

As far as I'm aware, as the benficiary of the fund, I am not considered to be the owner of that money right now. (Is that correct?) I could keep the fund ticking over and inherit it (U.K.) tax free when that time comes. But I would of course be liable for Japanese inheritance tax on it

I don't think you would inherit the trust assets on your father's death, unless some unusual stipulations have been written into the deed of trust. Currently, you are a discretionary beneficiary. Your father and sister are trustees. Your father is the settlor, ie the individual who established the trust and provided the initial funds. Trusts and taxes: Overview - GOV.UK states that the trustees own the assets, but perhaps it is more useful to think of the trust as the owner and the trustees as the custodians or managers. The trust ordinarily survives the death of a trustee. Sometimes a replacement trustee is necessary depending on the minimum number of trustees required (which may vary between types of trust?). Such a trust would not ordinarily be an inheritable asset in my understanding. That's why trusts work for avoidance of UK IHT -- a settlor establishes a trust, which is outside his estate (as the assets are no longer owned by him), and so upon his death, provided the 7yr hurdle has been cleared, the trust attracts no IHT. So in summary, a distribution is likely to be a gift rather than inheritance, and by my understanding this would hold true in Japan too.

If your understanding is correct, and this is taxed as a gift rather than inheritance, presumably this is negative for the beneficary as she/he will end up paying more tax?

[kuma]

Further reading:

1. u/starkimpossibility's response to a similar situation on r/JapanFinance

2. Revision of the Trust Law and Issues of Inheritance and Gift Taxes: research paper published on NTA website (referenced in 1.)

3. Basic knowledge of trusts: Rakuten guide to trusts following the New Trust Law

4. Chambers Global Practice Guide: Private Wealth - Japan (a digestible overview of topics including IHT and gift tax, with some detail on trusts)

The above seems to weigh on the side of being subject to gift tax at the point of establishment of the trust. (So, lookthrough or transparent, in other terms.)

[Crudzilla]

Thanks again Kuma.

I also found that reddit post during my research at the weekend.

It looks like the Trust is not a good way to pass on wealth to those in Japan as, yeah, it is basically treated as a gift at the time of establishment, and the gift tax is a lot harsher than inheritance tax.

Though if the beneficiary was not resident in Japan (for tax purposes) at the time of the trust's establishment, would it be correct to assume that no Gift Tax would be owed? Even when recieving money from the trust? As the gift was made before the beneficiary was residing in Japan, I guess in that situation the beneficiary would be deemed as having been in posession of that trust since it's setablishment, and thus owe capital gains taxes on the contents of the trust?

One other quick question regarding gift tax calculations. If I want to pass some money on to my son it would seem regular gifts from an early age is wise? Gifts up to 1.1m are exempt, right? Then there are the brackets, starting at 10% for up to 2m. My question is: Does the gift exempted by the 1.1m allowance count into the 2mil bracket.

i.e. If I made a gift of 3.1mil in a single year would the tax be:
10% on 2m
or
20% on the full amount? (at the 3-4m bracket applying to children under the age of 18)

Thanks!

[kuma]

If your understanding is correct, and this is taxed as a gift rather than inheritance, presumably this is negative for the beneficary as she/he will end up paying more tax?

Yes.

Though if the beneficiary was not resident in Japan (for tax purposes) at the time of the trust's establishment, would it be correct to assume that no Gift Tax would be owed?

Correct.

Even when recieving money from the trust? As the gift was made before the beneficiary was residing in Japan, I guess in that situation the beneficiary would be deemed as having been in posession of that trust since it's setablishment, and thus owe capital gains taxes on the contents of the trust?

Correct again.

I was actually drafting something about other taxes due by the beneficiary last night... hats off to your research on this matter.

There could be Japanese tax on income, dividends and capital gains arising within the trust:

As the beneficial owner of trust assets, any traditionally taxable event occurring inside the trust, despite probably being tax-exempt in the country where the trust is domiciled, will be taxable for the purpose of Japanese tax. The result is that any investment income, dividends, or capital gains arising from distributions or asset sales within the trust will create a tax obligation for the beneficiary in the same way it would have done had they owned the assets personally here in Japan. In other words, the tax protections that a trust would typically provide are destroyed.

Source: https://www.tytoncapital.com/portfolio/ ... -in-japan/

[kuma]

One other quick question regarding gift tax calculations. If I want to pass some money on to my son it would seem regular gifts from an early age is wise? Gifts up to 1.1m are exempt, right? Then there are the brackets, starting at 10% for up to 2m. My question is: Does the gift exempted by the 1.1m allowance count into the 2mil bracket.

i.e. If I made a gift of 3.1mil in a single year would the tax be:
10% on 2m
or
20% on the full amount? (at the 3-4m bracket applying to children under the age of 18)

Thanks!

Disregard the exempt 1.1m portion when calculating the gift tax.
So 10% on 2m in your example.

And if you gave 4.1m in a year,
1.1m is exempt
2.0m is taxed at 10% (200,000)
1.0m is taxed at 15% (150,000)
Total tax = 350,000

But there's no need to calculate each portion manually, especially if looking at higher tax brackets.

You may have already seen these tables: https://taxsummaries.pwc.com/japan/indi ... ther-taxes

The calculations are made as follows:
Firstly, exclude the 1.1m exempt portion and consider the remaining amount, which is 3m in this example.
Find the relevant row in the table.
3m is in the 15% bracket and that row states a deduction of 100,000
Calculate as 3m (taxable amount) x 0.15 (tax rate) - 100,000 (deduction) = 350,000

[Tkydon]

Were you in Japan when your grandfather died?

And if so, how long had you been living in Japan at that time?

It would have been much better if you had received the money as Inheritance from your Grandfather at that time, than as gift from your father.

How to calculate the Inheritance Tax Deduction:

See
https://retirewiki.jp/wiki/Inheritance_tax

Basic Deduction of Y30,000,000 + Y6,000,000 per Statutory Heir (2024 rates).

If your father was the only Statutory Heir, then the Basic Tax Deduction would be Y30M + 1 x Y6M = Y36M Tax Free in Japan after 1-Jan-2015
If your father had one sibling, then the Basic Tax Deduction would have been Y30M + 2 x Y6M = Y42M Tax Free in Japan after 1-Jan-2015
and so on - Y36M, Y42M, Y48M, Y54M, etc...

How many beneficiaries in Japan? Just you? In which case, you get to use the entire Basic Deduction against your share of the Inheritance.

If the total inheritance received by all heirs and beneficiaries in Japan, when converted at the Exchange rate when he died, was less than that Basic Deduction, then the Inheritance would be Tax Free. Any excess would be subject to Japanese Inheritance Tax.


However, The Basic Deduction before 1-Jan-2015 (H27) was Y50M + Y10M per Statutory Heir,

https://www.nta.go.jp/publication/pamph ... pdf/02.pdf

The Inheritance Tax Rates in 2014 after all Deductions and allowances were:

各取得分の金額 税率 控除額
1000万円以下 10％ -
3000万円以下 15％ 50万円
5000万円以下 20％ 200万円
1億円以下 30％ 700万円
3億円以下 40％ 1,700万円
3億円超 50％ 4,700万円

But GBP 200,000 x 181.71 on 4-Nov-2014 for example = Y36,342,000

Well below the Y60M of the 2014 Basic Deduction with only 1 Statutory Heir (your father), so would have been completely free of Inheritance Tax.

You would only then be liable for Capital Gains Tax at 20.315% (15% National, 0.315% Reconstruction, and 10% Residents' taxes) on the gain since then, all calculated in JPY.

You should consult with a Tax Accountant such as

https://chester-tax.com/plan/global-inheritance_en.html

[Crudzilla]

Were you in Japan when your grandfather died?
And if so, how long had you been living in Japan at that time?
It would have been much better if you had received the money as Inheritance from your Grandfather at that time, than as gift from your father.

Just using this quote to hopefully 'tag' you as well Kuma

Okay, another monster post, but I feel like I'm starting getting a handle on all this. Unfortunately it seems like my family and I made some really unfortunate decisions due to our lack of knowledge of the Japanese laws regarding Trusts & Tax Residency. Here is the full timeline.

2013 - I have been living in Japan for 9 years on a type 1 visa, thus at this time I am not yet resident in Japan for tax purposes (I was unaware of these distinctions until this year). My Grandfather passes away. He leaves money to my father but not to me directly. My father decides to pass much of the money on to me and my siblings and informs me of this in an email (he is giving 100k GBP to me).

Also 2013 - My brother wants to buy a house but has trouble getting a mortgage as he just returned from living in Africa. He needs 200k. My father asks me if I will lend him my 100k at a rate of interest that will be matched to a mutual fund I would otherwise have invested my money in. I agree to do so. (I have never taken actual posession of the money at this point.)

2014 - I have now lived in Japan for a total of 10 years (of the last 15) and thus become tax resident in Japan.

2015 - My brother qualifies for a mortgage and repays the loan (with interest) the money goes into my parents joint post office account (with some money inherited from a friend of the family that brings it up to 140k GBP) it still hasn't touched any of my accounts.

2016 - We were originally planning to invest the money in the UK but the asset management company we were planning on using stop accepting overseas investors due to a tighening of EU laws. The money remains in my parents PO account.

2017 - I feel this will be seen as the decisive event. The money (somehow 200k now) is placed into the Discretionary Gift Trust as it is a way to get the money invested without me being resident in the UK. It also removed the money from my parent's estate for UK IHT purposes. We are feeling good about this arrangement, completely ignorant that Japan has unique laws regarding trusts. Nothing is declared to the Japanese authorities regarding the establishment of this trust as I (wrongly) believed that I was not yet in posession of anything.

2024 - I finally start getting financially literate in Japan, open up brokerage account & NISA and start at looking at how I might begin moving the contents of the trust to Japan. Thanks to the advice recieved here I realise that the establishment of the trust will likely be seen as a 'gift' at that time under Japan's tax law.

Now on to possible treatments / options, I'll go from least likely to most likely:

1. (Pretty unlikely & much too complicated). I can convince the Japanese tax authorities that I was gifted the money by my father at the time of my Grandfather's death. I feel that I am unlikely to be able to prove this, though I do have the loan agreement drawn up between me, my brother, and my father. This would bring 100k GBP completely out of consideration as I was not yet resident for tax purposes in Japan. I would likely have to pay some kind of tax on the interest from my brother's loan, and have additional complexity regarding gift taxes on the extra funds added to the trust.

2. (What I am hoping will be possible). I accept that I was gifted the money (exactly 200k GBP) on the day the trust was established in 2017. The exchange rate on that day happened to be precisely 150yen to the pound. Thus I was gifted 30m yen. I have read about the "Inheritance Tax Settlement Syetem" 「相続時精算課税制度」. It seems that could be used prevent gift tax (technically defered to inheritance tax) on 25m of that 30m yen. I would pay 20% gift tax on the remaining 5m, but that also factors into the calculation at time of inheritance.

This seems like the best possible outcome for me, providing I can utilize the Inheritance Tax Settlement System in retospect. I save much of what would be a crippling 55% gift tax on the establishment of the trust. And defer that to the much kinder inheritance system. The total amount falls within my inhertance tax allowance so I believe I would actually be refunded that gift tax at time of inheritance (or not if I exceeded the allowance due to additional inheritance at that time).

The favorable exchange rate at that time would also play to my advantage. I would just need to pay some capital gains on the growth of the trust in the interim, along with some interest and fines related to late filing/payment (I need to find out how severe these might be). Previously any additional gifts from my father would have to be added into the system and taxed at that flat 20% meaning you lose access to the 1.1m gift tax exemption, but a revision this year seems to restore the 1.1m exemption for gifts after 2024.

3. (My last resorts). As the trust is discretionary in nature, my father could dismantle it returning the money to him, and we just forget that it ever existed... He would then gift me the money in the present, using the same Inheritance Settlement System. The downside being that it has now grown to ~250k GBP in the trust, and the exchange rate is much less favorable (giving a total of almost 50m yen) of which only half could be included in the tax free part of the system, the other half getting that flat 20% gift tax, and the total amount already exceeding my inheritance tax allowance. I could live with this outcome.

4. (Other last resort). I quietly cash the trust out into my U.K. bank account and hope I never get asked about it. Seems foolish.

5. (The absolute worst). I eat the 55% gift tax on the money I recieved, plus god knows how much in late fees and fines on that amount of tax. I can't really bring myself to accept this one.

I'm really hoping number 2 is feasible. It seems like it should be. But I'd love to hear your thoughts, before I consult with one of the tax & inheritance specialists that have popped up in this thread.

[Crudzilla]

I'm also trying to understand the penalties that might be involved, but I'm finding this document impenatrable.
https://www.nta.go.jp/english/taxes/others/01/14001.htm
It's pretty dense... Can anyone help?

I'm gathering there are two penalties involed:
Deliquent Tax (for late payment) & Additional Tax (for late filing).
I'm stuggling to make sense of whether they can both apply and how they apply.

My confusion on reading it it to the best of my ability:

Delinquent tax will be imposed if your payment of the principal amount of tax is overdue as follows:
(2) There is the amount of tax payable in the case of a tax return being filed after the statutory due date or an amended tax return being filed.

This seems to indicate that Delinquent Tax is owed in the case of late filing.

But then under the Delinquent Tax Rate section:

(1) Until the day on which two months has passed since the following day of the specific due date for tax payment (Note 2)
In principle, 7.3% per annum is applied.

After the day on which two months has passed since the following day of the specific due date of tax payment
In principle, 14.6% per annum is applied.

But with Specific Due Date defined (in Note 2) as:
(Note 2)

The specific due date for tax payment means variously depending on cases:
− In the case where a taxpayer filed a tax return by the statutory due date of tax return, the statutory due date of tax return.
− In the case where a taxpayer filed a tax return after the statutory due date of tax return or filed an amended return, the day on which the return was filed.
− In the case of correction or determination, the day on which one month has passed since the day following the day on which a notification of correction or determination is issued.

That seems to indicate that in the case of late filing, the specific due date becomes the date of filing and the penalty rates only apply after that date (so no Delinquent Tax due if paid when filing?)

What do you make of it!

Moving on to Additional Tax it seems relatively simple:

Additional tax for failure to file
If a tax return is filed after the statutory due date for filing tax return or a notice of determination is issued, it is generally supposed that an additional tax for failure to file is imposed at 15% of the principal amount of tax.

It's a flat 15% penalty on the tax owed?

In the case where the principal amount of tax exceeds 500,000 yen, 20% additional tax is applied to the excess amount.

(With an additional 20% penalty on any amount exceeding 50man?)

[Beaglehound]

Usual caveats, but your option 3 sounds worth investigating to me. You have never actually had possession of any money as far as I can see, and if there is no trust anymore there is no gift...

If that were possible, would you not be better off waiting to actually inherit rather than go down the gift route? Apologies if I have missed something and you need the money now for whatever reason.