Basics of inheritance tax you should know
According to the National Tax Agency's "Overview of Inheritance Tax Filing Results," the inheritance tax rate (the percentage of deceased individuals subject to inheritance tax) has been rising year by year. For Reiwa 6 (2024), it reached 10.4%, meaning approximately 1 in 10 deceased individuals are subject to inheritance tax.
This time, we will explain the basic content of inheritance tax, which may no longer be considered someone else's problem (?). Inheritance will eventually affect everyone, so let's take this opportunity to grasp the basics!
Inheritance Tax Filing Deadline and Payment Methods
Filing and payment of inheritance tax must be completed within 10 months from the day after the date on which the commencement of inheritance became known (Inheritance Tax Act, Articles 27 and 33).
If the division agreement cannot be reached by the deadline, there is a method called "un-divided filing" (Inheritance Tax Act, Article 55), where you file based on the statutory inheritance shares. If the division is finalized within 3 years after the filing deadline, you can re-apply the special provision and receive a refund.
Payment of inheritance tax is generally made in a lump sum with cash. If lump-sum cash payment is difficult, you can apply for "deferred payment" (Article 38 of the same Act) with installment payments after providing collateral. If that is also difficult, you can apply for "payment in kind" (Article 41 of the same Act) using assets such as real estate.
Calculating Inheritance Tax in 4 Steps
To understand inheritance tax, the first step is to grasp the flow of tax calculation. It generally proceeds in the following four steps.
- ① Calculation of Taxable Estate
- ② Allocation by Statutory Inheritance Share
- ③ Calculation of Total Inheritance Tax
- ④ Calculation of Each Person's Tax Liability
Let's look at each item in order below.
Debt Deduction
① Calculation of Taxable Estate (Note: Distinguish between taxable and non-taxable assets!)
The basis for inheritance tax is the amount obtained by subtracting "negative assets" such as debts like loans and unpaid taxes, and funeral expenses (debt deduction, Inheritance Tax Act, Article 13) from "positive assets" such as cash, deposits, real estate, and securities.
Additionally, life insurance benefits and retirement allowances received due to the death, even if not considered "positive assets" during the decedent's lifetime, are also added as "deemed inherited assets" subject to taxation.
Furthermore, gifts received within a certain period before the start of inheritance are added back (brought forward) to the taxable amount (Inheritance Tax Act, Article 19). This period was previously "within 3 years," but due to tax reforms, it will be gradually extended for gifts from January 2024 onwards, eventually becoming "within 7 years" (the extended 4 years will be exempt up to a total of 1 million yen).
On the other hand, assets for ancestral rites such as graves and Buddhist altars, and assets donated to the government or public institutions are not taxable and therefore not subject to this (Inheritance Tax Act, Article 12).
| Classification | Specific Details |
|---|---|
| Taxable Assets | Positive assets (cash, deposits, real estate, securities, etc.) / Deemed inherited assets (life insurance benefits, retirement allowances, etc.) / Gifted assets within 7 years before the start of inheritance (gradually being extended) |
| Non-taxable Assets (Exempt Assets) | Assets for ancestral rites such as graves and Buddhist altars / Assets donated to the government or public institutions / Amounts within the tax-exempt framework (5 million yen x number of statutory heirs) for life insurance benefits and retirement allowances |
| Negative Assets Deductible from the Total Estate Value (Debt Deduction) | Debts such as the decedent's loans and unpaid taxes / Funeral expenses |
From this, we further deduct the "basic exemption" (Inheritance Tax Act, Article 15).
Basic Exemption Amount = 30 million yen + 6 million yen x Number of Statutory Heirs
If there are a spouse and 2 children, totaling 3 heirs, the basic exemption amount is "30 million yen + 6 million yen x 3 people = 48 million yen." If the total estate value is below this amount, there is no need to file or pay inheritance tax.
Even if someone waives their inheritance, the number of statutory heirs does not decrease (Inheritance Tax Act, Article 15, Paragraph 2). Also, adopted children can only be counted as one statutory heir if there are biological children, or up to two if there are none (same paragraph, items). The total of assets and deductions calculated up to this point is the "Taxable Estate Value" in Step ①.
② Allocation by Statutory Share (Who Pays Inheritance Tax)
Inheritance tax is paid by those who acquire property from the deceased (the decedent), so not only legal heirs but also beneficiaries who receive property by will are subject to the payment obligation. On the other hand, for the calculation of inheritance tax, it is initially assumed that legal heirs have acquired property according to their legal shares, regardless of the actual distribution ratio of the estate. Then, the taxable estate amount calculated in ① is allocated proportionally.
The order of legal heirs is determined by the Civil Code. The spouse is always an heir. For others, the order is: ① children, ② lineal ascendants (parents, grandparents), and ③ siblings. If there is an heir in a higher order, those in lower orders will not be heirs. The "legal inheritance share," which serves as a guideline for the acquisition ratio for each heir, is stipulated in Article 900 of the Civil Code as follows.
| Heir combinations | Spouse | Other heirs |
|---|---|---|
| Spouse and children | 1/2 | Children: 1/2 (equally divided among the number of children) |
| Spouse and lineal ascendants (parents, etc.) | 2/3 | Lineal ascendants: 1/3 (equally divided among the number of ascendants) |
| Spouse and siblings | 3/4 | Siblings: 1/4 (equally divided among the number of siblings) |
③ Calculation of the total inheritance tax (inheritance tax rates)
Apply the tax rates to the amounts allocated in ②. Inheritance tax uses a progressive tax rate system, where the higher the amount acquired, the higher the tax rate (Article 16 of the Inheritance Tax Act). The quick calculation table published by the National Tax Agency is as follows.
| Amount acquired according to legal inheritance share | Tax rate | Deduction amount |
|---|---|---|
| Up to 10 million yen | 10% | — |
| Over 10 million yen to 30 million yen | 15% | 500,000 yen |
| Over 30 million yen to 50 million yen | 20% | 2 million yen |
| Over 50 million yen to 100 million yen | 30% | 7,000,000 yen |
| Over 100 million yen to 200 million yen | 40% | 17,000,000 yen |
| Over 200 million yen to 300 million yen | 45% | 27,000,000 yen |
| Over 300 million yen to 600 million yen | 50% | 42,000,000 yen |
| Over 600 million yen | 55% | 72 million yen |
The "Total Inheritance Tax" is the sum of the tax amounts calculated by applying the above tax rates to the amounts allocated to each heir. A simple numerical example is as follows.
[Calculation Example] Total estate value: 150 million yen; Heirs: Spouse and 2 children (total 3 people)
- Total taxable inheritance: 150 million yen - Basic deduction 48 million yen = 102 million yen
- Spouse (statutory inheritance share 1/2 = 51 million yen): 30% - 7 million yen = 8.3 million yen
- Per child (statutory inheritance share 1/4 = 25.5 million yen): 15% - 0.5 million yen = 3.325 million yen (6.65 million yen for 2 children)
- Total inheritance tax: 8.3 million yen + 6.65 million yen = 14.95 million yen
④ Calculation of each person's tax liability (apportioned by actual inheritance ratio)
The "total inheritance tax" calculated in ③, when allocated according to the actual inheritance ratio, becomes each person's tax liability. Because inheritance tax calculations can be complex, we recommend consulting a tax advisor if you need to know the exact amount.
Main special provisions for inheritance tax
While there are special provisions for inheritance tax that can reduce the tax burden if certain requirements are met, there are also systems that conversely increase the tax amount. Here, we will introduce four points that are particularly important to know.
[Special Provision for Small-Scale Residential Land, etc.]
This is a special provision (Article 69-4 of the Act on Special Measures Concerning Taxation) that allows for the reduction of the assessed value of land for the deceased's home or business use, if certain requirements are met by the heir who acquires it. In the calculation of the total taxable inheritance in step ①, the land's assessed value can be reduced by up to 80%.
For example, even if the assessed value of the land for your home is 50 million yen, if it can be applied as specific residential land, etc., the amount included in the taxable value will be compressed to 10 million yen (50 million yen x (1 - 80%)). This is a special provision that has a greater impact the more you own property in urban areas.
Furthermore, the requirements are finely divided depending on who acquires the land (spouse, cohabiting relative, non-cohabiting relative, etc.). Therefore, if a relative other than the spouse acquires the land, it is necessary to meet the requirements for cohabitation and continued ownership, and prior confirmation is important.
| Land classification | Limit area | Reduction rate |
|---|---|---|
| Specific residential land, etc. (land for home) | Up to 330㎡ | 80% |
| Specific business land, etc. (land for business) | Up to 400㎡ | 80% |
| Land for rental business, etc. (land for rental apartments, etc.) | Up to 200㎡ | 50% |
[Non-taxable limit for life insurance proceeds]
If there are life insurance proceeds with a statutory heir as the beneficiary, inheritance tax will not be incurred up to the following amount (Article 12, Paragraph 1, Item 6 of the Inheritance Tax Act).
Non-taxable limit for life insurance proceeds = 5 million yen x number of statutory heirs
In the calculation of the total taxable inheritance in step ①, life insurance proceeds are aggregated as "deemed inherited property" subject to taxation, but the amount exceeding the non-taxable limit mentioned above will be reduced.
For example, consider a case where a family of a husband, wife, and two children has a life insurance policy where the husband designated the wife and a friend as beneficiaries, each receiving 10 million yen. The total amount of insurance money received by the statutory heirs (wife and two children, totaling 3 people) is only 10 million yen received by the wife. Since this is below the tax-exempt limit of 15 million yen (5 million yen x 3 people), the 10 million yen received by the wife is entirely tax-exempt (there is no need to even apply the basic exemption or the spousal tax reduction mentioned later).
Note that this tax-exempt framework only applies to insurance money received by statutory heirs (in the example above, the 10 million yen received by the friend, who is not a statutory heir, cannot be covered by the tax-exempt framework and is fully taxable). Also, be aware that it cannot be used for insurance money received by someone who has renounced their inheritance.
[Spousal Tax Reduction]
Property acquired by a spouse through inheritance or bequest is not subject to inheritance tax up to the greater of 160 million yen or half of the statutory heir's share (Article 19-2 of the Inheritance Tax Act). In calculating the tax payable by each person in Step 4 of the calculation process, the tax corresponding to the portion of the property acquired by the spouse up to this amount is reduced.
To utilize this special provision, it is essential to file an inheritance tax return, even if the tax payable is 0 yen, so please be aware of this.
Furthermore, concentrating too much property on the spouse can often lead to an increase in the total inheritance tax in the "secondary inheritance" upon the spouse's death. Therefore, we recommend simulating the total amount through both the primary and secondary inheritances.
[20% Additional Tax on Inheritance Tax (20% Special Provision)]
If the person who acquired property through inheritance or bequest is not the decedent's spouse or a lineal blood relative of the first degree (children or parents), an amount equivalent to 20% of the calculated inheritance tax will be added (Article 18 of the Inheritance Tax Act). In calculating the tax payable by each person in Step 4 of the calculation process, the 20% equivalent amount is added to the calculated tax of the person concerned before determining the payable tax.
For example, like the friend in the life insurance example above, if a person who is neither an heir nor a spouse acquires property through a bequest, or if siblings become heirs, they will be subject to this 20% additional tax.
Note that measures such as adopting a grandchild while the original heir (child) is alive, so-called "grandchild adoption," are also subject to this 20% additional tax (Article 18, Paragraph 2 of the Inheritance Tax Act). However, it does not apply if the grandchild is a substitute heir due to circumstances such as the child predeceasing the decedent. When considering adoption for inheritance planning, please be mindful of this point.
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