UK houses and capital gains tax

[IloveJapan]

Hi, I may inherit a UK house in the future.

I was alarmed at sth I read in a different forum, about capital gains tax at the time of inheritance.

Sb wrote they had inherited a UK house and that they had to pay capital gains tax on the house, with the base value being the value at which their parents paid for it in the 1980s!

Up till now, I thought that under Japanese law you would simply pay inheritance tax based on the current market value of the house…

In the past few decades, UK house prices have risen like crazy, so if parents bought a British house a few decades back, then almost the entire market value of the house could be a capital gain, could it?

Could anyone enlighten me?

[TokyoWart]

I think you are mixing two different taxes. Inheritance tax for receiving the asset itself, which will be related to its current value with all of the exceptions and modifications that go into calculating inheritance tax, and capital gains tax when you sell an asset. I believe Japan handles the cost basis of assets you receive by inheritance or gift as being the same as the cost basis the "giver" had. Inheritance tax itself is not a capital gains tax but a transfer tax.

[Deep Blue]

Yes, as TokyoWart says these are two taxes. You’ll be liable for IHT when you receive the inheritance.

You’ll only pay CGT when you sell it.

But you are correct the CGT will be based on your parents purchase price, not the market value at the time of the inheritance.

Japan will fuck you over both ways. Likely to be better to hang on to the property and only sell after you leave Japan.

[IloveJapan]

Thank you both for your feedback…

I think maybe a lot of British people in Japan have to sell?

Well, when the time comes to inherit, I suspect I might be forced to sell, in order to simply have cash to pay inheritance tax in the first place! I mean, In most UK-based families, the house is the main asset. As far as I remember, Japan’s CGT stands at 20% but I’d have to check to make sure.

Has anyone else been in this situation?

I don’t know if there are any deductions available…

I just hope house prices in the UK really do decline. They could, given higher interest rates and the economy’s general state.

[northSaver]

Well, when the time comes to inherit, I suspect I might be forced to sell, in order to simply have cash to pay inheritance tax in the first place! I mean, In most UK-based families, the house is the main asset. As far as I remember, Japan’s CGT stands at 20% but I’d have to check to make sure.

I've heard that only a small percentage of inheritors (3.5%?) have to pay UK inheritance tax (IHT) due to the various deductions available. You can easily increase the tax-free threshold to £1 million if you know what you're doing. And if you don't know what you're doing, pay an expert to help you. It will be worth it! Furthermore, the current UK government is seriously considering scrapping IHT altogether.
Japanese IHT is a different matter. More siblings means less tax, even if they don't live in Japan. But also a smaller share of the assets of course.
Yes, Japanese CGT is 20% if the property was owned (by your parent) for more than five years, otherwise 40%.

Has anyone else been in this situation?

No, but probably will be within the next few years.

I don’t know if there are any deductions available…

There's an akiya deduction of 3000 man which might be applicable. I don't know if anyone has successfully claimed this against a foreign property as the paperwork (e.g. proof of earthquake resistance) must be daunting. More info here:
https://www.nta.go.jp/taxes/shiraberu/s ... okurei.htm

I just hope house prices in the UK really do decline. They could, given higher interest rates and the economy’s general state.

Why? A lower sale price results in a lower inheritance. Lower CGT is a just minor benefit in my opinion.

[RetireJapan]

Is it possible for the estate to sell the house in order to pay UK taxes and costs?

If so you might avoid the Japan capital gains tax issue altogether as you just receive net cash from the inheritance.

[Deep Blue]

Is it possible for the estate to sell the house in order to pay UK taxes and costs?

If so you might avoid the Japan capital gains tax issue altogether as you just receive net cash from the inheritance.

This sounds like a good idea.

[Beaglehound]

Is it possible for the estate to sell the house in order to pay UK taxes and costs?

If so you might avoid the Japan capital gains tax issue altogether as you just receive net cash from the inheritance.

An interesting suggestion. I suspect the inheritance valuation tax date (for want of a better expression) may be the date of death. Certainly that was the case in the UK when my father died last year. Whether that might preclude selling the house during probate as a way to escape CGT I am not sure.

[Deep Blue]

It must be fairly common in the UK to sell parts of the decedents estate to pay the (UK) IHT bill, which is of course levied on the estate rather than the inheritor (inheritee?)

[northSaver]

It must be fairly common in the UK to sell parts of the decedents estate to pay the (UK) IHT bill, which is of course levied on the estate rather than the inheritor (inheritee?)

No, it's not common because less than 4% of estates pay IHT according to the latest HMRC figures. And I suspect that Beaglehound is right about inheriting the property on the date of death.

The only ways to avoid paying Japanese CGT as far as I know are:

1. Don't sell the house (as you suggested above). This creates expenses and complications but could be a good idea if you plan to move back to the UK in the future.

2. Get your parent to sell their house before they die. Only really feasible if they want to downsize or move to a nursing home.

3. Don't report the sale to the Japanese tax office. Illegal and obviously not recommended!

Otherwise, just pay the 20% tax and try not to worry about it