Upon determining that you are taxable, or if your heirs will in the future be liable for inheritance tax, the next step is to familiarize yourself with the system for calculating this tax. Upon death and succession, inheritance tax is payable to the National Tax Agency within 10 months in order to avoid penalties. Late payment or miscalculation of payment can involve a penalty of up to 20% of the unpaid amount of tax, as well as a potential flat penalty of up 500,000 JPY per infraction, plus interest depending on how late you pay the penalty. Further, if the tax office determines that there was any malfeasance involved in the mis-payment or failure to declare, the statute allows for up to one year imprisonment. For this purpose, it is imperative that you speak with a financial advisor as well as a Japanese CPA when determining the specific inheritance tax liability. Before retaining professional services, it is useful to first familiarize yourself with the inheritance tax liability calculation. This way you can have an idea of what to expect in the future and how to plan accordingly.
Japan Inheritance Tax Calculations
The first major distinction is that Japanese inheritance tax is levied not on the deceased, but on the individual heirs (/recipients of assets). This is contrary to other countries, the UK for example, whereby the tax is levied singularly on the entire estate of the deceased. Japanese forced heirship laws also determine specifically who receives inheritance and in what portion. In practice, you are able to put together a last will and testament in Japan which provides some flexibility on your own estate planning needs. However, for a will to be enforceable in Japan it must coincide with the Japanese Civil Code, and as such, is limited in scope and capability. For those that die in Japan without a will, the statutory directives will apply. A typical example would be that in the event of death of one parent, the spouse is entitled to 50% of the estate and the remainder is split evenly among the children.
Example Tax Calculation
(For simplicity purposes, assume all assets are taxable under Japanese law.)
The first step is to determine the net taxable assets after deducting funeral expenses and liabilities associated with the inherited assets (for example, mortgage remaining on an inherited piece of real estate). This example involves an expat who has been living in Tokyo for almost 30 years, has two adult children, has accumulated a long term savings and retirement portfolio, and has mostly paid off the family home.
| Inheritance | Net taxable asset | ||
| Successor | Taxable assets | Liabilities and/or Funeral expenses | |
| Spouse | 120,000,000 | 20,000,000 | 100,000,000 |
| Child 1 | 50,000,000 | – | 50,000,000 |
| Child 2 | 50,000,000 | – | 50,000,000 |
| Total | 220,000,000 | 20,000,000 | 200,000,000 |
Net taxable assets applicable would in this case total 200 Million JPY. The next step is to apply the Basic Exclusion for inheritance tax calculation. The exclusion as of 2018 is 30,000,000 JPY plus 6,000,000 X the number of heirs (30,000,000 + 18,000,000 = 48,000,000). This yields an aggregated tax base of 152,000,000 JPY. From here, determine the taxable base given the statutory inheritance ratios.
| Inheritance | Individual Taxable Base | ||
| Successor | Statutory Share | Aggregate Tax Base | |
| Spouse | 1/2 | 152,000,000 | 76,000,000 |
| Child 1 | 1/4 | 152,000,000 | 38,000,000 |
| Child 2 | 1/4 | 152,000,000 | 38,000,000 |
The next step is to apply the marginal inheritance tax to each heir, according to the calculation table determined by the Japan tax agency.
| Tax base | Tax rate | Marginal Deduction | |
| up to | 10,000,000 | 10% | – |
| up to | 30,000,000 | 15% | 500,000 |
| up to | 50,000,000 | 20% | 2,000,000 |
| up to | 100,000,000 | 30% | 7,000,000 |
| up to | 200,000,000 | 40% | 17,000,000 |
| up to | 300,000,000 | 45% | 27,000,000 |
| up to | 600,000,000 | 50% | 42,000,000 |
| above | 600,000,000 | 55% | 72,000,000 |
Applying the marginal tax rate to each heir yields the following:
| Inheritance | ||
| Successor | Individual Tax Base | Gross Tax Liability |
| Spouse | 76,000,000 | 15,800,000 |
| Child 1 | 38,000,000 | 5,600,000 |
| Child 2 | 38,000,000 | 5,600,000 |
If the heirs received assets that were not exactly in line with the statutory ratios, to determine gross tax liability you would pro-rate the net taxable asset to the amount actually acquired. However, for simplicity purposes this example involves each heir receiving the standard mandated share.
While it may look as though the heirs are facing in total up to a quarter of a million dollar tax liability, there is one very important step remaining, the application of tax credits. The first and largest tax credit is for spouses. Although unlike most other countries which do not tax asset transfers between spouses, Japan does in fact levy such a tax. The good news, however, is that the tax credit between spouses is substantial, sitting at 160,000,000 JPY. In the above example, this more than takes care of the wife’s gross tax liability. It is worth noting that this 160,000,000 JPY tax credit is not deducted against just the inheritance, but it is deducted against the potential inheritance tax itself.
| Inheritance | Tax Payable | ||
| Successor | Gross Tax Liability | Tax Credit | |
| Spouse | 76,000,000 | 160,000,000 | 0 |
| Child 1 | 5,600,000 | 0 | 5,600,000 |
| Child 2 | 5,600,000 | 0 | 5,600,000 |
The bad news, as is evident, is that depending on their age children receive little to no inheritance tax credit. Although one spouse typically outlives another by 5 to 8 years, the children will eventually have to pay the inheritance tax. If both parents were to die at the same time, for example in a car crash, the total estate would pass to the children at once, and they would be liable in total for over 30,000,000 JPY in tax. Given the potential for such a large and unexpected tax bill to come, during a time when quickly liquidating assets to pay intimidating bills should be the least of your children’s concerns, any working professional in Japan should take the time to consider planning for inheritance tax.
