Inheritance Tax Hypothetical (am I understanding this correctly?)

[achapman24]

Just hoping that someone can tell me if I understand the basic system correctly, since it seems fairly convoluted.

So to begin with, let's say that there's a hypothetical estate worth ¥8 million yen, to keep things simple. If I understand things properly, the inheritance taxes might go like this:

1. Father dies, 50% goes to mother, 25% to each of the two kids. This means ¥4 million to mother, ¥2 million to each child. Mother is not taxed, children are each taxed at the rate for ¥2 million.
2. Mother dies, 50% goes to each child. That means that sonny gets and is taxed on ¥2 million, princess receives and is taxed on ¥2 million.

In other words, the tax is based upon what the recipient receives and not upon the size of the estate, and if there's multiple heirs and a wife, the ¥8 million yen estate is ultimately taxed in four slices of ¥2 million, two to each child?

 

[hark]

@achapman24 This is addressed in the wiki as well.

https://japanfinance.github.io/tax/inheritance/

But several issues with what you're writing to think about:

1. when you say "goes to", the percentages you're describing are the inheritance provisions under Japanese civil law. So when in a Japanese family of four, the father dies, 50% of the estate goes to the wife and 25% to each child. Japan defaults to the laws of the deceased for rules of distribution. So Americans are governed by American rules (in each state). Brits ( thanks @nicoleb07 ) follow a system where if your center of life is in a country, that country's system determines ... so Brits follow the Japanese civil law if they live in Japan.
2. Inheritance tax is not identical to the inheritance provisions themselves but they work well together for Japanese-only inheritance. As others pointed out, 8 million is under the statutory deduction.
3. The inheritance taxes when they do apply are progressive so if the husband died with a 100 million yen estate, then it would be 50 million for the wife and 25 million for each of the kids. The tax calculation would first exempt 48 million (30 million + 3 heirs). Giving each person a tax burden relative to their received share. Wife would be 50% of the tax on 52 million, each child 25% of the tax on 52 million yen ... but the wife would also have a generous spouse deduction that would probably wipe out her tax burden. So each kid would be taxed 25% of the tax on 52 million.

Then when the wife passes, assuming she has no other assets and spent no money, each child gets another 25 million, with a deduction of 42 million (30 million + 2 heirs), so they each pay half of the tax on 8 million yen.

 

[achapman24]

@hark OK thank you. The part I'm not clear on is when you say "each kid would be taxed 25% of the on 52 million". If 25% of 52 million yen is 13 million yen, are they using the progressive tax rate on 13 million, or are they using the progressive tax rate on the 52 million and then distributing what is left after that?

 

[hark]

@achapman24 tax rate is based on the size of the estate but then distributed based on the amount received.

The tax rate on anything under 1000万円 is 10% so the total tax owed from everyone would be 5.2 million yen. So each kid's tax obligation would be 1.3 million yen. Wife's tax obligation would be 2.6 million yen but there's a spousal deduction that tends to wipe that out for her.

 

[achapman24]

@hark OK, if you can be so kind, can you tell me how it works if we add some zero's here because I'm not really asking about the deduction. So what if it's an ¥800 million estate and not ¥8 million.

 

[phillev]

@achapman24 You could have stopped at “8 million yen”, because even before counting statutory heirs, its way below the basic inheritance tax deduction. Therefore, everyone will pay zero.

 

[onthemoon]

@achapman24 If your hypothetical is really ¥8 million, then there’s nothing to worry about since that is nothing and you won’t have to worry about inheritance tax at all

 

[lifeabundant]

@achapman24 The first tax free bracket is ¥30M. You can Google it, NTA provides these details in English as well.

 

[jbrad01x]

@achapman24

the tax is based upon what the recipient receives and not upon the size of the estate

The total tax is based upon how much of the estate is subject to Japanese taxation (minus deductions, e.g. for the spouse and for the number of statutory inheritors). The amount, then, that each is taxed is prorated based upon how much of the estate they actually receive (with special rules for a spouse).

But as @phillev said, with 8 million yen nobody will be taxed.