Clarifications for the Inheritance wiki page

[ntombelasbo]

I read the Inheritance wiki page and saw 2 confusing points. Could someone please clarify?

First:

Surviving spouses have large tax credit. Basically you find out how much inheritance tax the spouse is theoretically supposed to pay, and then you reduce that bill to the extent that it corresponds to an inheritance valued at less than 160 million yen (or 50% of the estate, whichever is larger).

I cannot understand the bold part. There is a this pdf file that states seemingly a different thing: the spouse inheritance tax payment is reduced by 160M or the spouse's share of inheritance, whichever is larger.

Second:

3/ Then the crucial final step is to add all the tax liabilities together (770万円 in our example) and distribute them proportionally according to the actual distribution of the assets that are subject to Japanese inheritance tax.

In the 1億円 example, the total Japanese inheritance-tax liability is 770万円. If the Japan-resident sibling inherits all assets included in the "total value of the estate", the Japan-resident sibling would be assigned the entire Japanese tax liability, thus they would owe 770万円 on their 1億円 inheritance. The non-Japanese resident sibling, regardless of what they received, would not be taxed.

In this example, the Japan-resident sibling has to pay all 100% tax liability of the asset.

• Should he/she pay 50% of the tax liability if he/she only receives 50% of the asset, which is the typical case? The non-Japanese resident sibling does not pay tax, thus only 50% of the tax liability is paid?
• In the extreme case, if the Japan-resident sibling actually receive 0% of the asset, then could he/she not pay any tax, and thus none of the tax liability should be paid?

 

[hark]

@ntombelasbo I don't know for the first question but for the second question, you need to keep in mind that the amount the Japan resident sibling pays only looks at the Japan-visible assets.

The extreme case is thus simple.

Step 1: calculate Japan visible estate = 0

done. Absolutely no taxes owed.

For other cases, the result of all of the machinations is a larger tax deduction than would otherwise exist due to the existence of overseas statutory heirs and the imagined idea that the estate is being split among them and each taxed on what they received. So it's cheaper in three ways:

1. only looks at Japan-visible estate
2. calculates the deduction based on statutory heirs who aren't in Japan (30 million + 6 million / heir tax free)
3. calculates total tax as if everyone is in Japan and it's going be distributed (so instead of taxing the sole inheritor for inheriting 5000 million yen, it would tax as if two people were reach receiving 2500 million yen or 10 people each receiving 500 million yen, etc.).

All of which greatly lowers the taxes compared to a single inheritor of the same amount from a Japanese estate.

 

[kristhuy]

@ntombelasbo

I cannot understand the bold part. There is a this pdf file that states seemingly a different thing: the spouse inheritance tax payment is reduced by 160M or the spouse's share of inheritance, whichever is larger.

The PDF states:

The amount equivalent to the spouse's statutory share of inheritance or 160 million yen, whichever is greater, is deducted from the amount of tax.

The "amount" referenced at the start of that sentence refers to the amount of tax. It is not the value of the assets inherited by the spouse. See the NTA's explanation here. The spouse's tax credit corresponds to the proportion of tax payable on the spouse's statutory share of the inheritance or 160 million yen, whichever is larger.

Should he/she pay 50% of the tax liability if he/she only receives 50% of the asset

If they receive only 50% of the taxable value of the estate, then they will only owe 50% of the tax liability. But that would mean the estate must consist of assets located in Japan, because assets inherited by the non-Japan-resident sibling would not otherwise form part of the taxable value of the estate.

So, for example, if the estate consists solely of Japanese real estate and the Japan-resident sibling inherits half the Japanese real estate, the Japan-resident sibling will only owe half the tax due on the estate. But the non-Japan-resident sibling will owe the other half.

which is the typical case?

I don't think so. The typical case is the one described in the wiki, where the Japan-resident sibling inherits the entire taxable value of the estate.

The non-Japanese resident sibling does not pay tax, thus only 50% of the tax liability is paid?

No, there is no scenario in which the total tax on the estate is not paid. If the non-Japan-resident sibling inherits some of the taxable estate (as in the real estate example above), the non-Japan-resident sibling will owe Japanese inheritance tax.

if the Japan-resident sibling actually receive 0% of the asset, then could he/she not pay any tax, and thus none of the tax liability should be paid?

If the taxable value of the estate is zero, then obviously no inheritance tax is payable.

 

[ntombelasbo]

@kristhuy

The "amount" referenced at the start of that sentence refers to the amount of tax. It is not the value of the assets inherited by the spouse. See the NTA's explanation here. The spouse's tax credit corresponds to the proportion of tax payable on the spouse's statutory share of the inheritance or 160 million yen, whichever is larger.

Thank you. For confirmation, the spouse's tax credit is the larger of 160M yen or the spouse's statutory share of inheritance value. And this tax credit is subtracted from the spouse's tax liability. Is that right? [EDIT: No. Upon closer inspection, I understand that the larger of 160M yen or the spouse's statutory share of inheritance value is not the tax credit itself, but is used to compute an "imaginary tax liability" which is then used as the spouse's tax credit.]

If they receive only 50% of the taxable value of the estate, then they will only owe 50% of the tax liability. But that would mean the estate must consist of assets located in Japan, because assets inherited by the non-Japan-resident sibling would not otherwise form part of the taxable value of the estate.

How about the case that the deceased parent lived in a foreign country and the inheritance estate is in that foreign country (let's say 100M yen), and each of the two siblings actually receives 50% of the estate? I think that the Japan-resident sibling has to pay only 385万円 (actually receive 50% so pay 50% of total tax liability), and the non-Japan-resident sibling pays nothing (not living in Japan). Thus the total paid tax is only 385万円. Is that right?

 

[kristhuy]

@ntombelasbo

I understand that the larger of 160M yen or the spouse's statutory share of inheritance value is not the tax credit itself, but is used to compute an "imaginary tax liability" which is then used as the spouse's tax credit.

Kind of. I think the simplest way to explain it is just that the spouse's tax credit equals the amount of tax payable on the spouse's statutory share of the inheritance or 160 million yen. This "tax payable" is not imaginary or hypothetical. It's the actual tax liability of the estate.

An analogy would be the basic deduction for income tax purposes of 480,000 yen. The basic deduction means that: if you don't earn more than 480,000 yen per year, you won't owe any income tax, and if you earn more than 480,000 per year, you won't pay any income tax on 480,000 yen of your income.

Similarly, the spousal tax credit means that: if the spouse doesn't inherit more than 160 million yen or their statutory share, they won't owe any inheritance tax, and if they inherit more, they won't pay any inheritance tax on 160 million yen (or their statutory share, if larger) of the inheritance.

Thus the total paid tax is only 385万円. Is that right?

No. I think you're getting confused between the value of the estate and the taxable value of the estate. As described in the wiki, the taxable value of the estate is limited to:

• all assets inherited by the Japan-resident heir;
• all assets located in Japan; and
• all assets which were previously subjected to Japan's "early inheritance" system.

In your example, if the Japan-resident sibling only receives 50 million yen of the 100 million yen estate, then the taxable value of the estate will be 50 million yen. Thus the Japan-resident sibling will be inheriting 100% (not 50%) of the estate for Japanese tax purposes, and they will owe 100% of the inheritance tax on the estate.

However, in that case, the total inheritance tax on the estate would be much lower than 385万円, because the 385万円 figure corresponds to half the inheritance tax on a taxable estate of 100 million yen (not the inheritance tax on an estate of 50 million yen).

Note that the worked example in the wiki describes a scenario where the taxable value of the estate (i.e., the amount inherited by the Japan-resident heir, located in Japan or subject to the early inheritance system) is 100 million yen. The amount inherited by the non-Japan-resident sibling in the example is not mentioned, because it is not relevant. If you want to assume the estate was split equally, you can assume the non-Japan-resident sibling also inherited 100 million yen, but that figure doesn't affect the calculations.

 

[ntombelasbo]

@kristhuy Thank you. It is much clearer now. The value vs. taxable value was indeed my confusing point.