Legally Reducing Inheritance Tax
Posted: Sun Aug 22, 2021 2:28 am
How to legally reduce inheritance taxes
I mentioned seeing a highly qualified financial advisor in a separate post but the advice sought was mostly not specific to that thread so I started this new one. In short, he highly recommended reducing inheritance taxes by buying local investment property (he didn’t know if the same tax breaks apply to foreign property, but there is no reason to think that different rules would apply.) A quick summary of the details follow :
1. Like many inheriting from their spouse, neither my wife or I will have to pay inheritance tax since the total inheritance forthcoming to the surviving spouse will be under the ¥1.6 oku (approx US$1.5 million) limit beyond which inheritance tax must be paid. That’s good news.
2. The even better news is that a spouse inheriting the family home will receive a 80% reduction in the property valuation if they are residing there and if the house is under 330m2.
3. Further good news: It must also be emphasized that the official property valuation used (固定資産税評価額) is well below the market value as well. The combination of a 80% reduction of that already low valuation is a generous and effective way for Japan to allow widows/widowers to keep living in the family home. And it also greatly reduces the likelihood of paying any inheritance tax for all but the very rich. At least for spouses…
4. The bad news is that all other inheritance, such as the typical case of you inheriting from your parents, or your own heirs when you die, 10~50% progressive tax will be paid on almost every yen inherited, although the standard deductions (¥3,000man + ¥600man per person inheriting) are permitted.
5. But if children were to inherit property rather than say cash, however, their tax burden would halve according to the advisor. But the information I have read online suggests that the reduction applies to the land value and not the building value. That’s still a serious advantage!
6. The financial advisor also suggested that real estate is about the only option for a medium risk/medium gain investment and recommended it as a good way to rebalance portfolios away from the usual ETF/bond-heavy distribution.
7. While warning against expectations of capital gains, he noted that investing in a 1DK about 10~20 years old in the central Tokyo area within 10 minutes walk of subway or train stations, especially ones that are only 1~2 stops from major hubs like Shibuya, should ensure constant rental income and minimize your investment losing value in future, if at all. Central Tokyo will always be a magnet for single occupancy households composed of students, young and/or single workers and tanshinfunin. (As to capital gains, recent Nomura data we found shows that land values in Ginza have been steadily rising since the 1990s and is now 25.8% higher than even the 1991~1992 inflated Bubble era peak.)
8. What’s the catch? You need to have owned the properties for at least 3 years so deathbed buying sprees will not help you outrun the taxman.
9. Finally, he recommended that we simulate the tax implications of the death of the first spouse (primary inheritance or 一次相続) as well as the remaining spouse (secondary inheritance or 二次相続) to get a full picture of how much we will leave our spouse/children, and how much tax they will have to pay. The details matter, as illustrated below.
10. Otherwise, it seems there are not so many other legal strategies to minimize inheritance tax. Firstly, there is the tax free annual gifts of ¥1.1 million noted elsewhere in this blog, and the ¥5 million in insurance death benefits each heir can receive tax free. Recently, I read that an heir is also entitled to a further ¥5 million as a retirement allowance but no additional information was given. Setting up a trust is another way grandparents can contribute via a bank-managed trust account of up to ¥15 million free from gift tax for future educational purposes, but I am not aware of any details. Does anyone have experience to share regarding any of these strategies?
11. I have also heard stories of parents and grandparents who have quietly paid for their adult children’s and/or grandchildren’s expensive meals, hotels, airfares, schooling, gifts, etc, but I myself would do anything illegal like that. Never. I would so much rather have my tax money spent on distributing free Abenomasks, hosting unprofitable and unsafe Olympic Games, and selling heavily subsidized public land to friends of the prime minister’s wife.
Estimating Inheritance Tax
For a detailed inheritance simulation to guide you to make your own estimates, there are many online examples such as <https://www.ht-tax.or.jp/sozoku-zeirish ... akaru.html>
The simulation in that link is based on ¥2 oku being left to a spouse and 2 kids. The results are, after basic exemptions are deducted, that the wife pays zero tax on her ¥1.5 oku inheritance and the 2 kids get ¥2,500 man each from which they each pay ¥337.5 man in inheritance taxes. That’s quite a lot of tax on the kids, with still a lot more being payable when the remaining parent dies.
How to Minimize Inheritance Tax
It’s really important to note that in order to truly comprehend the amount of tax involved, you need to simulate for both primary and secondary tax scenarios, especially as depending upon the proportions you bequeath, the total tax to be paid varies considerably because of the sliding tax scale applied. (Check out how to save more than ¥600man in total tax solely by altering proportions of the exact same inheritance of ¥2 oku at <https://www.zeirisi.co.jp/souzokuzei-ta ... heritance/ >.
All the more reason to plan your inheritance and to consider buying an investment property or five but I would love to hear of any other strategies out there for minimizing inheritance tax. Legally. That’s about as much as I’ve learned, but if anyone knows more, please clarify/correct.
I mentioned seeing a highly qualified financial advisor in a separate post but the advice sought was mostly not specific to that thread so I started this new one. In short, he highly recommended reducing inheritance taxes by buying local investment property (he didn’t know if the same tax breaks apply to foreign property, but there is no reason to think that different rules would apply.) A quick summary of the details follow :
1. Like many inheriting from their spouse, neither my wife or I will have to pay inheritance tax since the total inheritance forthcoming to the surviving spouse will be under the ¥1.6 oku (approx US$1.5 million) limit beyond which inheritance tax must be paid. That’s good news.
2. The even better news is that a spouse inheriting the family home will receive a 80% reduction in the property valuation if they are residing there and if the house is under 330m2.
3. Further good news: It must also be emphasized that the official property valuation used (固定資産税評価額) is well below the market value as well. The combination of a 80% reduction of that already low valuation is a generous and effective way for Japan to allow widows/widowers to keep living in the family home. And it also greatly reduces the likelihood of paying any inheritance tax for all but the very rich. At least for spouses…
4. The bad news is that all other inheritance, such as the typical case of you inheriting from your parents, or your own heirs when you die, 10~50% progressive tax will be paid on almost every yen inherited, although the standard deductions (¥3,000man + ¥600man per person inheriting) are permitted.
5. But if children were to inherit property rather than say cash, however, their tax burden would halve according to the advisor. But the information I have read online suggests that the reduction applies to the land value and not the building value. That’s still a serious advantage!
6. The financial advisor also suggested that real estate is about the only option for a medium risk/medium gain investment and recommended it as a good way to rebalance portfolios away from the usual ETF/bond-heavy distribution.
7. While warning against expectations of capital gains, he noted that investing in a 1DK about 10~20 years old in the central Tokyo area within 10 minutes walk of subway or train stations, especially ones that are only 1~2 stops from major hubs like Shibuya, should ensure constant rental income and minimize your investment losing value in future, if at all. Central Tokyo will always be a magnet for single occupancy households composed of students, young and/or single workers and tanshinfunin. (As to capital gains, recent Nomura data we found shows that land values in Ginza have been steadily rising since the 1990s and is now 25.8% higher than even the 1991~1992 inflated Bubble era peak.)
8. What’s the catch? You need to have owned the properties for at least 3 years so deathbed buying sprees will not help you outrun the taxman.
9. Finally, he recommended that we simulate the tax implications of the death of the first spouse (primary inheritance or 一次相続) as well as the remaining spouse (secondary inheritance or 二次相続) to get a full picture of how much we will leave our spouse/children, and how much tax they will have to pay. The details matter, as illustrated below.
10. Otherwise, it seems there are not so many other legal strategies to minimize inheritance tax. Firstly, there is the tax free annual gifts of ¥1.1 million noted elsewhere in this blog, and the ¥5 million in insurance death benefits each heir can receive tax free. Recently, I read that an heir is also entitled to a further ¥5 million as a retirement allowance but no additional information was given. Setting up a trust is another way grandparents can contribute via a bank-managed trust account of up to ¥15 million free from gift tax for future educational purposes, but I am not aware of any details. Does anyone have experience to share regarding any of these strategies?
11. I have also heard stories of parents and grandparents who have quietly paid for their adult children’s and/or grandchildren’s expensive meals, hotels, airfares, schooling, gifts, etc, but I myself would do anything illegal like that. Never. I would so much rather have my tax money spent on distributing free Abenomasks, hosting unprofitable and unsafe Olympic Games, and selling heavily subsidized public land to friends of the prime minister’s wife.
Estimating Inheritance Tax
For a detailed inheritance simulation to guide you to make your own estimates, there are many online examples such as <https://www.ht-tax.or.jp/sozoku-zeirish ... akaru.html>
The simulation in that link is based on ¥2 oku being left to a spouse and 2 kids. The results are, after basic exemptions are deducted, that the wife pays zero tax on her ¥1.5 oku inheritance and the 2 kids get ¥2,500 man each from which they each pay ¥337.5 man in inheritance taxes. That’s quite a lot of tax on the kids, with still a lot more being payable when the remaining parent dies.
How to Minimize Inheritance Tax
It’s really important to note that in order to truly comprehend the amount of tax involved, you need to simulate for both primary and secondary tax scenarios, especially as depending upon the proportions you bequeath, the total tax to be paid varies considerably because of the sliding tax scale applied. (Check out how to save more than ¥600man in total tax solely by altering proportions of the exact same inheritance of ¥2 oku at <https://www.zeirisi.co.jp/souzokuzei-ta ... heritance/ >.
All the more reason to plan your inheritance and to consider buying an investment property or five but I would love to hear of any other strategies out there for minimizing inheritance tax. Legally. That’s about as much as I’ve learned, but if anyone knows more, please clarify/correct.