RetireJapan

Posted: **Tue Oct 22, 2024 6:49 am**

Following on from my NISA questions (in the forDummies section of the forum) I have a somewhat complicated situation regarding some money left to me in the U.K. It's a little complex but maybe someone here can help me understand it. I'm really not versed up on any of this:

Background: I'm from the U.K. I live in, and am planning on retiring in Japan. To that end I recently started up a NISA account which I will max out for this year (and a good chunk of next year) with savings I have rather foolishly kept in cash until now. But following that, my income is not so high, and I am only planning on contributing 50k~100k per month via Tsumitate after that (plus possibly starting an Ideco). That would leave the 'growth' portion basically unutilized.

U.K. Situation (I am not 100% clear on this but to the best of my knowledge): My grandfather passed around 10 years ago. He left money to my father with the intention that it be shared amongst his grandchildren. At that time, I feared that my father giving the money (about 200,000 pounds) to me directly would have generated a Gift Tax liability for me in Japan (as the money was technically inherited by my father, not me). Also I could not have easily invested it in the U.K. as I was not resident there.

So instead my father placed it in a "Discretionary Gift Trust". This is a U.K. investment designed to reduce inheritance tax liability. Providing the money stayed in that trust for 7 years prior to my father's death (or any withdrawal) no U.K. inheritance tax would be incurred. Those 7 years are now passed, so it seems that with the trustees (father and sister) consent, money can be withdrawn from the fund. The fund is somewhat managed, and currently ticking over pretty well earning about 6-7% a year. It seems the fund is not subject to capital gains in the U.K.

Bringing it to Japan: 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 and the fund is steadily growing in the interim. So I am thinking of cashing out my Japanese Gift Tax allowance (currently unused) from the fund each year going forward and using it to top up the 'growth' portion of my NISA.

Do you think that is sensible. Am I missing / misunderstanding anything about this whole arrangement? Is it wise to bring as much of that money to Japan in yearly increments and top up my NISA, or should I just let it grow in he U.K. and deal with inheritance tax when the time comes (my inheritance tax shouldn't be too crazy as I have many non-Japan resident siblings, which seems to work in my favor with the Japanese calculations).

Any help / input much appreciated.

Posted: **Wed Oct 23, 2024 6:11 am**

I would take some professional advice in Japan as my understanding is trusts are not really a thing here, as the taxman tends to look through them. Since 200k GBP is a decent chunk of money, spending a few man yen on an hour with a professional would seem like a good investment.

Posted: **Wed Oct 23, 2024 9:04 pm**

There is some commentary how Japan treats trusts here:
https://www.withersworldwide.com/en-gb/ ... h-in-japan

Assuming the above secondary source is authoritative (arrived at by search engine rather than being a go-to resource), a lot hinges on whether the trust is considered passthrough or non-passthrough, with the former being considered for Japanese tax purposes as a gift to the beneficiary at the time of establishment of the trust with corresponding gift tax implications and the latter potentially having no gift tax liabilities.

Regarding the passthrough trust classification:

Under Japanese law, a trust should generally be treated as passthrough if it has a beneficiary for Japan tax purposes. A beneficiary is defined for Japan tax purposes as:

* a person who has a current beneficial right (a “Current Beneficiary”); or
* a person who can amend the trust and can potentially receive trust assets (a “Deemed Beneficiary”).

The guidance on what constitutes a Current Beneficiary is contained in an example set forth in a Japanese inheritance tax basic circular interpreting the trust taxation rules. Based on the example in the circular, if there is a condition precedent that must be met in order to receive any beneficial interest in a trust, a beneficiary should not be treated as a Current Beneficiary in the trust assets until the condition is fulfilled.

The criteria for non-passthrough trusts are lengthy... and not perfectly expressed in the article.

To potentially be classified as a non-passthrough trust, the following criteria should generally be considered...

Potentially; generally be considered... clear as mud, then! One of the bullet points under that reads:

* there is no beneficiary for Japanese tax purposes

=====

Due to the vagueness of the stated conditons for non-passthrough trusts, it is easier to assess the passthrough criteria.

The discretionary nature of the trust may or may not align with the "condition precedent" considered by Japan (extract of quote repeated below):

The guidance on what constitutes a Current Beneficiary is contained in an example set forth in a Japanese inheritance tax basic circular interpreting the trust taxation rules. Based on the example in the circular, if there is a condition precedent that must be met in order to receive any beneficial interest in a trust, a beneficiary should not be treated as a Current Beneficiary in the trust assets until the condition is fulfilled.

In a discretionary trust, the trustees have discretionary powers as to what and when to give assets to the beneficiaries. Is this a "condition precedent" for Japanese tax purposes?

Thomson Reuters Practical Law (UK) defines a discretionary trust as:

A flexible trust structure in which non ... sees fit.
https://uk.practicallaw.thomsonreuters.com/

That is perhaps indicatice of having "conditions precedent" imposed. Can you hunt "the guidance on what constitutes a Current Beneficiary is contained in an example set forth in a Japanese inheritance tax basic circular interpreting the trust taxation rules" or ensure that a professional is briefed to find and interperet this?

Are you aware of the trust deed and/or structure? It is quite common for trust deeds to include classes of potential beneficiaries such as children and/or grandchildren. If a class of potential beneficiaries is included, that potentially adds weight to a potential case (to the Japanese authorities) that you are not a guaranteed beneficiary; the funds could go in a different direction at the sole discretion of the trustees.

But then, what of the non-passthrough criterion (?) of no beneficiary for Japan tax purposes? You are resident for Japan tax purposes. But maybe you are only a potential beneficiary and fall short of being a "current beneficiary" due to conditions precedent. (When discretionary powers are used and you are given a portion of the trust, that gift will presumably be taxable, but if the trustees use their discretion to keep these gifts under the annual gift tax thresholds as you mentioned, then the gift tax will be zero.)

======

If the above hurdles (and others, no doubt) are passed and the trust is not classified as a gift to you at the time of establishment (if it were to be classified as a gift, you would have a hefty gift tax bill to pay retrospectively, with any fines and/or interest for late payment), then your "withdrawal" strategy (of course, assuming that the trustees apply their discretion in line with your plan!) sounds reasonable.

=================

Please bear in mind that the above are just ramblings and googlings from a stranger on the internet referring to secondary sources in English about complex transnational tax issues and specifically the Japanese interpretation thereof. As the previous poster said, large sums of money are involved here and due diligence should be taken. Having said that, interesting questions, and I hope you find the forum helpful for this and other matters.

Posted: **Wed Oct 23, 2024 10:42 pm**

kuma wrote: ↑Wed Oct 23, 2024 9:04 pm There is some commentary how Japan treats trusts here:
https://www.withersworldwide.com/en-gb/ ... h-in-japan

Assuming the above secondary source is authoritative (arrived at by search engine rather than being a go-to resource),

FWIW, and I am not competent to comment on all of the rest of your thoughts - I have used Withers for Japanese tax advice and was very happy with their service and the written advice they provided. They gave me confidence to restucture my family affairs before moving to Japan and I would recommend them.

Posted: **Thu Oct 24, 2024 12:18 am**

Apologies, I failed to correctly post the Thomson Reuters Practical Law (UK) definition of a discretionary trust. Reposted with it (hopefully) in place.

kuma wrote: ↑Wed Oct 23, 2024 9:04 pm There is some commentary on how Japan treats trusts here:
https://www.withersworldwide.com/en-gb/ ... h-in-japan

Assuming the above secondary source is authoritative (arrived at by search engine rather than being a go-to resource), a lot hinges on whether the trust is considered passthrough or non-passthrough, with the former being considered for Japanese tax purposes as a gift to the beneficiary at the time of establishment of the trust with corresponding gift tax implications and the latter potentially having no gift tax liabilities.

Regarding the passthrough trust classification:
Under Japanese law, a trust should generally be treated as passthrough if it has a beneficiary for Japan tax purposes. A beneficiary is defined for Japan tax purposes as:

* a person who has a current beneficial right (a “Current Beneficiary”); or
* a person who can amend the trust and can potentially receive trust assets (a “Deemed Beneficiary”).

The guidance on what constitutes a Current Beneficiary is contained in an example set forth in a Japanese inheritance tax basic circular interpreting the trust taxation rules. Based on the example in the circular, if there is a condition precedent that must be met in order to receive any beneficial interest in a trust, a beneficiary should not be treated as a Current Beneficiary in the trust assets until the condition is fulfilled.
The criteria for non-passthrough trusts are lengthy... and not perfectly expressed in the article.

To potentially be classified as a non-passthrough trust, the following criteria should generally be considered...
Potentially; generally be considered... clear as mud, then! One of the bullet points under that reads:

* there is no beneficiary for Japanese tax purposes
=====

Due to the vagueness of the stated conditons for non-passthrough trusts, it is easier to assess the passthrough criteria.

The discretionary nature of the trust may or may not align with the "condition precedent" considered by Japan (extract of quote repeated below):

The guidance on what constitutes a Current Beneficiary is contained in an example set forth in a Japanese inheritance tax basic circular interpreting the trust taxation rules. Based on the example in the circular, if there is a condition precedent that must be met in order to receive any beneficial interest in a trust, a beneficiary should not be treated as a Current Beneficiary in the trust assets until the condition is fulfilled.

In a discretionary trust, the trustees have discretionary powers as to what and when to give assets to the beneficiaries. Is this a "condition precedent" for Japanese tax purposes?

Thomson Reuters Practical Law (UK) defines a discretionary trust as:

A flexible trust structure in which none of the beneficiaries has the right to the capital or income of the trust. Instead, in a discretionary trust, beneficiaries have only the right to have the trust property administered and a right to be considered by the trustee, who can distribute capital or income to the beneficiaries on any terms that the trustee sees fit.
https://uk.practicallaw.thomsonreuters.com/

That is perhaps indicatice of having "conditions precedent" imposed. Can you hunt "the guidance on what constitutes a Current Beneficiary is contained in an example set forth in a Japanese inheritance tax basic circular interpreting the trust taxation rules" or ensure that a professional is briefed to find and interperet this?

Are you aware of the trust deed and/or structure? It is quite common for trust deeds to include classes of potential beneficiaries such as children and/or grandchildren. If a class of potential beneficiaries is included, that potentially adds weight to a potential case (to the Japanese authorities) that you are not a guaranteed beneficiary; the funds could go in a different direction at the sole discretion of the trustees.

But then, what of the non-passthrough criterion (?) of no beneficiary for Japan tax purposes? You are resident for Japan tax purposes. But maybe you are only a potential beneficiary and fall short of being a "current beneficiary" due to conditions precedent. (When discretionary powers are used and you are given a portion of the trust, that gift will presumably be taxable, but if the trustees use their discretion to keep these gifts under the annual gift tax thresholds as you mentioned, then the gift tax will be zero.)

======

If the above hurdles (and others, no doubt) are passed and the trust is not classified as a gift to you at the time of establishment (if it were to be classified as a gift, you would have a hefty gift tax bill to pay retrospectively, with any fines and/or interest for late payment), then your "withdrawal" strategy (of course, assuming that the trustees apply their discretion in line with your plan!) sounds reasonable.

=================

Please bear in mind that the above are just ramblings and googlings from a stranger on the internet referring to secondary sources in English about complex transnational tax issues and specifically the Japanese interpretation thereof. As the previous poster said, large sums of money are involved here and due diligence should be taken. Having said that, interesting questions, and I hope you find the forum helpful for this and other matters.

Posted: **Thu Oct 24, 2024 12:35 am**

Oh no, not another post!!!

Just to add:

A gift tax is imposed when you receive properties donated by individuals.
When you receive properties donated by a corporation such as a company, income tax instead of gift tax is imposed.

https://www.nta.go.jp/english/taxes/others/02/15002.htm
[NTA English site]

Careful investigation would be required to determine whether Japan treats a distribution from the trust in question as liable for gift tax (ie 'properties donated by individuals') or income tax ('properies donated by a corporation such as a company').

One source suggests the trust(ee) is treated legally as a person, so gift tax would apply (if the bit about 'title holder' is satisfied in this circumstance):

Under Japanese law, a trustee or private foundation who is a title holder of the assets is generally deemed as a separate/independent legal person from the settlor or beneficiary.

https://www.amt-law.com/asset/res/news_ ... ja_001.pdf
Q26 referenced here; the source breaks things down into relatively digestible chunks and may a good background resource for your case

Posted: **Thu Oct 24, 2024 12:43 am**

kuma wrote: ↑Wed Oct 23, 2024 9:04 pm Please bear in mind that the above are just ramblings and googlings from a stranger on the internet referring to secondary sources in English about complex transnational tax issues and specifically the Japanese interpretation thereof. As the previous poster said, large sums of money are involved here and due diligence should be taken. Having said that, interesting questions, and I hope you find the forum helpful for this and other matters.

Wow, thank you so much for your researched and considered reply. Ramblings and googlings asside, I really appreciate you taking the time to give it some thought, and having someone to discuss this with. Truly above and beyond anything I expected when posting. I had assumed trusts would just be inherited asssets at the time of inheritance (that seems like a much simpler system!). So it is interesting to hear of this passthrough and non-passthrough classification.

Personally I am (naturally) partial to your reading of this trust possibly being non-passthrough due to it's discretionary nature

. On one hand, the trust has only a single listed beneficiary, and by my understanding, if the primary trustee (my father) were to pass away, the trust would immediately pass to me (which sounds like an extremely passthrough kind of situation).

On the other hand, with the consent of the secondary trustee (actually my sister), at any time before it would be inherited, they can unilaterally with withdraw from, empty, or disolve the trust (which sounds very non-passthrough). In that sense I am very much only a 'potential beneficiary'. There is no current legal guarantee that I will benefit from this trust. Given that it's my father and sister, I am of course expecting to.

Giving a logical argument to this perspective (and I appreciate logic may not play a role!). If the beneficiary of the trust (me) was to pay the gift tax bill upon the trust's establishment (or sometime soon), and the trust was later emptied or disolved, then I would have paid a lot of tax on money that I never actually recieved, that doesn't sound like it would be 'fair' in the eyes of the law. I would hope that this kind of situation would be precisely the reasoning behind the 'non-passthrough' classification's existence.

One further question I now have, which is a broader issue and I would imagine has a clearer answer...
Assuming this trust was to be classed as 'passthrough' and I am already liable for a (hefty) gift tax bill. I wonder if I would in fact be liable for any fines due to late payment of said bill. It is entirely possible that this trust was established without my knowledge. There is nothing about the trust (or most trusts, I imagine) that states the beneficiary must be informed of it's existence. It would seem overly punitive to fine a beneficiary for a trust they had no knowledge of.

What do you think? (And thanks once again!)

Posted: **Thu Oct 24, 2024 1:09 am**

On the topic of being taxed on money not receive, Japan NTA has already gone after individuals and screwed them over by imposing crippling tax bills on money they may never receive. This was inheritance tax on potential, future pension income…

https://www.asahi.com/ajw/articles/14844606

So I wouldn’t rely on the concept of fairness….

Posted: **Thu Oct 24, 2024 1:26 am**

Deep Blue wrote: ↑Wed Oct 23, 2024 10:42 pm
kuma wrote: ↑Wed Oct 23, 2024 9:04 pm There is some commentary how Japan treats trusts here:
https://www.withersworldwide.com/en-gb/ ... h-in-japan

Assuming the above secondary source is authoritative (arrived at by search engine rather than being a go-to resource),
FWIW, and I am not competent to comment on all of the rest of your thoughts - I have used Withers for Japanese tax advice and was very happy with their service and the written advice they provided. They gave me confidence to restucture my family affairs before moving to Japan and I would recommend them.

Thank you for the recommendation. I read through the Withers primer on Private Wealth in Japan that @Kuma linked and it was clear and well written. It seems like they are knowledgeable on precisely the situation that I need advice for. Especially regarding the classification of trusts as passthrough or non-passthrough. I was not even aware that trusts in Japan are basically treated as an immediate gift to the beneficiary. It's quite a wild situation!

I think I definately need professional advice, and Withers seems like a good place to go.

Posted: **Thu Oct 24, 2024 1:50 am**

Deep Blue wrote: ↑Thu Oct 24, 2024 1:09 am On the topic of being taxed on money not receive, Japan NTA has already gone after individuals and screwed them over by imposing crippling tax bills on money they may never receive. This was inheritance tax on potential, future pension income…

https://www.asahi.com/ajw/articles/14844606

So I wouldn’t rely on the concept of fairness….

Having lived here a while, I have certainly learned not to rely on concepts of 'fairness' or 'logic'.
At least they were charged inheritance, the gift tax brackets are even more horrendous.

RetireJapan

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