Inheritance Tax Questions (after reading past threads)

[nhacaik]

Dear fellow redditors,

I've been scouring through previous posts on the topic of inheritance taxes and the calculations behind them but has anyone actually gone through the process or spoken to a tax advisor or the NTA and received advise on what is the correct way to calculate your tax liability?

For someone who is the only member of the family (all non-Japanese + no inheritance taxes in home country) who is an unlimited taxpayer in Japan (i.e PR/Spouse visa) while the rest of the family members are "restricted" tax payers (no tax residency in Japan, have lived overseas all their lives), my initial understanding was that the only assets visible to Japan for inheritance tax purposes would be the assets solely to be inherited by the unlimited tax payer (with the assumption that all assets in the estate of the deceased are "foreign" and does not include any Japanese stock, properties, etc).

I saw a link shared previously by @kristhuy here. Using the same logic as that link and assuming an estate of say, USD 4M (no Japanese assets) and an allocation of 50% each for 2 children (1 restricted taxpayer/non-Japanese tax resident "A", and 1 is an unlimited taxpayer in Japan "B") - the tax for "B" should be calculated as:

(assuming 1 USD = JPY 100 for simplicity although I know USD/JPY is crazy now)

1. 50% of USD 4M = USD 2M (assets visible to Japan / only the inheritance to be received by "B" as all assets are based overseas and should not include "A"s portion) or JPY 200M
2. Less deduction of JPY 30M + 6M + 6M (basic deduction + JPY 6M deduction per heir) = JPY 42M
3. Tax base for "B": (JPY 200M - JPY 42M) / 2 = JPY 79M = JPY 158M
4. Going by the progressive tax rate table: JPY 46.2M inheritance tax owed (1st 10M at 10%, next 20M at 15%, next 20M at 20%, next 50M at 30% and remaining 58M at 40%)

• Note: Not sure if step #3 is correct but that is what was done here (in the given example the amount post-deduction was divided by # of heirs)
• Edit: Removed step 3, as that seemed incorrect based on the comments received.

Update: Based on the comments below (big thanks to @kristhuy) I have revised the way (as below) the inheritance taxes should be calculated (based on current tax rules).

• A) Assets visible to Japan (i.e only the portion to be inherited by "B" based on assumptions set out above: JPY 400M x 50% = JPY 200M
• B) Less deductions of JPY 42M (30M basic + 6M per statutory heir): JPY 200M - JPY 42M = JPY 158M
• C) Taxable base for each statutory heirs: JPY 158M / 2 heirs = JPY 79M
• D) Japanese tax liability for each statutory heir: JPY 16.7M
• E) Amount in D) x number of statutory heirs: JPY 16.7M x 2 = JPY 33.4M (to be borne by "B" as he is the sole unlimited taxpayer and will bear 100% of JP tax liability)

I consulted with a tax advisor but was told that the above calculation was wrong and that the Japanese tax authorities looked at the whole estate on a worldwide basis (that is, the USD 4M in my example above) and amount of tax payable by "B" would be calculated by USD 4M (or JPY 400M- JPY42M deduction) / 2 = which gives a hefty tax base of JPY 179M or about JPY 54.6M in taxes owed!

I'm not sure if he's correct so I wonder if any of you had a different result after consulting with your advisors.

(Links I referred to as below)

• https://www.reddit.com/r/japanlife/comments/j4ws1i
• https://www.reddit.com/r/JapanFinance/comments/sd1ojt
• https://www.reddit.com/r/japanlife/comments/j4ws1i
• https://www.reddit.com/r/japanlife/comments/ltdid5

Please comment if you have experience with this or if you can recommend a good English speaking tax-advisor who is well-versed on international inheritances. Thank you!

 

[kristhuy]

@nhacaik

Not sure if step #3 is correct but that is what was done here

No, you've misunderstood what is being done at that link, and you've misunderstood what my past comments said, and I think you may even have misunderstood what your advisor told you.

You can safely ignore property outside Japan inherited by limited taxpayers. But you have to take into account all statutory heirs for the purpose of calculating the tax due. So step 3 is where you're going wrong.

The taxable base for each statutory heir is 79 million yen. This means that each statutory heir will generate 16.7 million yen worth of Japanese tax liability. Thus the total Japanese tax liability is 33.4 million yen.

Since the unlimited taxpayer in your example is inheriting all the property visible to Japan, they must bear 100% of the Japanese tax liability. Hence their tax liability will be 33.4 million yen on the 200 million yen that they inherited.

 

[resjudicata]

@kristhuy

The taxable base for each statutory heir is 79 million yen. This means that each statutory heir will generate 16.7 million yen worth of Japanese tax liability. Thus the total Japanese tax liability is 33.4 million yen.

Interesting. So the inheritance is divided twice, but the people (or person) in Japan have to cover the tax for everyone. This actually reduces the amount of tax owed in Japan, and the more heirs their are anywhere, the less the total tax bill in Japan?

 

[kristhuy]

@resjudicata

the more heirs their are anywhere, the less the total tax bill in Japan?

Yep. More statutory heirs always reduces the ultimate tax bill, even if they don't live in Japan.

 

[nhacaik]

@kristhuy Thanks for the reply @kristhuy - appreciate your patience in explaining this.I removed step 3 above and re-did the calculations earlier but it seems its still wrong based on your comment.

Please let me know if I am following you correctly:

1. You mentioned that the taxable base for each statutory heir is 79 million yen (I assume this is after ignoring property outside Japan inherited by "A").
2. So just the portion of "B" of JPY 200M is considered assets visible to Japan. I then take this less JPY 42M of deductions and divide by 2, which gives JPY 79M (but this tax base is now not just for "B" but for "A" too).
3. Based on progressive tax rates and as you mentioned, this amounts to JPY 16.7M of tax per statutory heir (which you mentioned above).
4. "This means that each statutory heir will generate 16.7 million yen worth of Japanese tax liability. Thus the total Japanese tax liability is 33.4 million yen." So even if one statutory heir is a limited taxpayer ("A") that still generates Japanese tax liability and "B" has to bear that portion too?

 

[kristhuy]

@nhacaik

even if one statutory heir is a limited taxpayer ("A") that still generates Japanese tax liability and "B" has to bear that portion too?

A doesn't end up with any liability because they aren't (in this scenario) inheriting any taxable property. It's just that to work out how much tax is due on the estate, it's necessary to imagine a kind of "ideal" distribution of property according to a statutory distribution under Japan's Civil Code.

In the case of two children this "ideal" distribution is 50/50. So you take the taxable property and distribute it 50/50 for the purposes of calculating the tax on the estate. Then you distribute that tax liability based on how much taxable property each heir actually inherited. Since B actually inherits 100% of the taxable property, they must bear 100% of the tax liability.

A simpler example, not involving limited taxpayers, would be two siblings in Japan whose last remaining parent dies and leaves one sibling significantly more than the other. Because inheritance tax rates are marginal and calculated at the level of the individual, if you started with the actual amounts inherited by each heir, the total inheritance tax on the estate would vary depending on how equal the heirs' shares are. To avoid this kind of uncertainty, the tax is calculated on the basis of a 50/50 distribution, and then the tax amount is assigned to each heir based on how much they actually inherited (so if you only inherit 25% of the estate, you only pay 25% of the tax).

It's also worth noting that in most cases this calculation method results in a lower tax burden, with respect to the whole estate, than the alternative.

 

[nhacaik]

@kristhuy Thank you so much @kristhuy!

Super knowledgeable and helpful as always.