Japan has the highest inheritance tax rate in the world, starting at 10% and increasing up to 55% depending on the inheritance amount. The basic exemption is ¥30 million, plus an additional ¥6 million per statutory heir in Japan.
IHT can vary around the world and expats must remember that IHT is based on where you are domiciled and not currently residing. For example, if you are a UK-born expat but live in Japan, IHT is based on UK laws, not Japanese.
If you are wondering how you can structure assets efficiently, I have written a few blogs on the subject and will link them at the end of the blog. If you have any questions, you can contact me using the chatbox, or by the button.
IHT in Japan
If the net inherited asset is below the exemption figure after subtracting expenses such as funeral fees, individuals are exempted from paying the inheritance tax. However, if the inherited assets exceed this figure, the total taxable assets are calculated by subtracting the inherited assets’ value from the basic exemption value.
Inheritance tax in Japan is imposed on the beneficiaries, not the estate. The calculation of inheritance tax depends on the number of statutory heirs. According to the Japanese civil code, the deceased’s spouse is entitled to 50% of the total assets, while the remaining assets are divided equally among the children. In the case of inheritance tax, the spouse pays 50%, and the remaining 50% is split equally among the children.
Inheritance tax must be paid to the National Tax Agency within ten months of the decedent’s death, not when the inheritance was received. Failure to pay on time attracts stiff penalties ranging from fines to imprisonment.
Both Japanese citizens and foreigners are subject to Japan’s inheritance tax laws. Citizens who receive any inheritance above the basic exemption must pay the inheritance tax, regardless of whether the inheritance is located in Japan or overseas.
For foreigners and expatriates, different criteria determine whether they are subject to Japan’s inheritance tax laws. Those with a table 2 visa (permanent resident, long-term resident, spouse/child of a national/permanent resident) must pay the inheritance tax, regardless of their length of stay in Japan or where the inheritance is located. Expatriates with a table 1 visa are exempt from paying the inheritance tax only if they pass the residency time test, which means they must have stayed in Japan for less than ten years in the past fifteen years and are considered temporary citizens.
In 2017, Japan modified its inheritance tax law, exempting expats who had lived in Japan for less than ten years from paying the inheritance tax. This exemption applied only to inheritances received in Japan, and not to those received overseas. However, if the foreigner renewed their visa, such that their length of stay exceeded ten years, or they acquired another visa for long-term residency, they would be taxed on both Japanese and overseas inheritances.
Another twist in this change was that if the expatriate left Japan after spending more than ten years, they would still need to pay inheritance tax on overseas inheritances within five years of leaving. However, in 2018, the rules were relaxed, and expatriates no longer had to pay inheritance tax after leaving Japan.
In 2021, Japan reformed its inheritance tax laws, exempting the donor or decedent from the residency period test (“ten out of fifteen-year time rule”). Thus, even if the donor or decedent did not pass the residency time test, the inheritance tax would not be triggered. Additionally, the five-year tail rule was also modified.
If an expatriate falls into the category of those who have to pay inheritance tax, they can minimize the impact by investing in real estate and using life insurance to reduce their inheritance tax liability, as trusts cannot be used in Japan for this purpose.
One way to reduce the impact of inheritance tax in Japan is to invest in real estate. In Japan, the tax-assessed value of property is often lower than the actual market value, resulting in lower inheritance tax liability. Our real estate experts can provide advice on available property options.
Expatriates can also take advantage of other exemptions, such as mortgage exceptions, foreign tax credits, donations to public organizations, and retirement allowances, to minimize their inheritance tax burden.
Another simple solution to cover any potential inheritance tax bills is to use life insurance. By estimating the current inheritance tax bill, expatriates can take out a policy that will cover this amount.
Conclusion
There are ways you can reduce IHT while in Japan, one way is investing in Japanese real estate, however, this depends on your situation and what assets you currently have.
There may be alternative ways to reduce IHT, especially as an expat. If you have any questions, please contact me using the button below.
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