Inheritance Tax

Relevant threads are found under the flair Inheritance / Estate, also check Personal Finance » Inheritance Planning.

For general topics regarding passing, such as end of life care, making a will etc, please check the Life Events > Death page.

Fair warning the tax is counterintuitive and you likely need to carefully read through the calculation section step by step to correct natural misconceptions :

Inheritance tax can generate significant concern at first, especially when looking only at the inheritance tax rates and considering the whole estate, but taking the time to understand its mechanics and counter-intuitive calculation shows it is not due in 90% of the cases, only cover certain assets, and actual rates are progressive.

Who is subject to inheritance tax?

Inheritance Taxation overview

Japan has a pretty wide inheritance taxation and one might be concerned when first hearing they might be subject to tax both in Japan and abroad. However in practice, only a small portion of estate actually end up paying large inheritance tax due to the deductions and progressive rates. It's worth noting that only around 9% of all estates are subject to inheritance tax and only around 0.07% of estates are large enough to be subject to an effective tax rate (tax as a proportion of the estate) of more than 25%.

Japan taxation does not apply by default to the total estate, it focuses only on assets in Japan or gifted to people that are relevant from Japan tax perspective, and ignore the rest of the assets. This is described in the first step of Calculation section below.

(Ref 1 - https://www.nta.go.jp/publication/pamph/sozoku/shikata-sozoku2022/index.htm)

Question	Answer
Who must file?	People who owe inheritance tax (Ref 1).
When do they have to file?	within 10 months of the relevant death (Ref 1).
Must inheritance taxes be filed if no tax is due?	No (Ref 1).
When do assets change hands for Japanese tax purposes?	Regardless of inheritance systems elsewhere, immediately at the time of death, even if the inheritance is only accepted latter.
Can someone reject an inheritance?	In case there are debt, or assets than you do not want to manage (such as remote land that you won't find buyer for, but need to pay tax on), you can refuse the whole inheritance, but must do so quickly.

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).

Japan provides a fairly straightforward foreign tax credit with respect to foreign inheritance taxes imposed on assets located outside Japan.

Payment of inheritance tax can be deferred.

Calculation of Inheritance Tax

In this example, a foreign parent passes away in a foreign country, leaving a large estate to two children, one living in Japan and one living in a foreign country. There are therefore two statutory heirs, important to calculate deduction.

Note that the legal concept of statutory heir is defined by law as close living relatives, and are different from a regular heir, i.e. someone actually receiving money in a will. Determining statutory heirs is usually surviving spouse and children, but can be complex (remarriage, deceased children, adopted children, etc.).

There are three steps to the calculation that have to be done separately :

1/ The first step is calculating the total value of the estate for Japanese inheritance-tax purposes. When the deceased is a foreigner living outside Japan, this will be the value of:

• all assets inherited by the Japan-resident heir (assuming they are an "unlimited taxpayer" for Japanese inheritance tax purposes);

• all assets located in Japan; and

• all assets which were previously subjected to Japan's "early inheritance" system.

Note that this does not include all assets of the estate, only the ones subject to Japanese inheritance tax.

Once you know the total value of the estate for Japanese inheritance-tax purposes, you have to subtract the basic deduction (3,000万円, plus 600万円 per statutory heir) and then distribute the remaining value according to the statutory distribution (generally 50% to a surviving spouse, then an equal amount to each surviving children). In our example, that's a 50/50 distribution to the two siblings.

2/ So if the total value of the estate for Japanese income-tax purposes, calculated above, is 1億円, for example, each sibling will be deemed to have received 2,900万円 【(1億円 - 3,000万円 - 2⨉600万円)/2】. The tax liability attributable to each heir is then calculated at inheritance tax rates (see below). In our example, this would generate a deemed tax liability of 385万円 per heir.

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.

Above but as a table:

Step	Calculation	Outcome
1. Determine Total Value of Japan-Visible Estate	10,000万円 from someone not in Japan to 1 recipient in Japan a = 10,000万円	10,000万円
2. Apply Basic Deduction to Japan-Visible Estate	(1億円 - 3,000万円 - 2⨉600万円)/2	2,900万円 expected share/heir
3. Calculate owed tax per expected heir	100万円 + （(2900万 - 1000万)*15%)	385万円
4. Calculate full estate tax	2 expected heirs * 385万円	770万円
5. Distribute based on received part	770万円 * 100%	770万円

Special note: if the actual recipient is not a statutory heir (e.g. is a friend of the deceased, a spouse of a statutory heir, etc.), the final tax burden for that person is increased by 20%. In our example above, if instead of "Japanese-resident child bequeathed 1億円" it was "Japanese-resident child and their spouse each bequeathed 5,000万円", the tax liability calculated in steps 1 and 2 above would not change, as the spouse is not a statutory heir and therefor not included in those calculations. However, in step 3, the 770万円 liability would be applied proportionally to the child and their spouse (385万円 each), but the spouse, not being a statutory heir, gets a 20% surcharge, meaning that their final tax is 385万円*1.2 = 462万円.

These same steps can be quickly applied to different scenarios using this online inheritance tax calculator which was built by a Redditor following this guide. Note that this calculator only works in a similar case to the above scenario, i.e. an heir living in Japan while the deceased, their estate and all other heirs are non-Japanese resident.

Inheritance Tax Rates.

As described above, an entire estate is not taxed as a lump sum, but rather, tax is calculated on what each statutory heir would in theory receive from that part of the estate subject to Japanese inheritance tax (minus standard deduction), and those taxes are then summed.

As of April 2023, the per-statutory heir tax is as follows (https://www.nta.go.jp/taxes/shiraberu/taxanswer/sozoku/4155.htm):

Amount	Tax - Deduction (to make it progressive)
less than 1,000万円	10%
less than 3,000万円	15% - 50万円
less than 5,000万円	20% - 200万円
less than 1億円	30% - 700万円
less than 2億円	40% - 1,700万円
less than 3億円	45% - 2,700万円
less than 6億円	50% - 4,200万円
6億円 or greater	55% - 7,200万円

The 50万円 deduction for > 1000万円 but less than 3000万円 makes it so that the first 1000万円 is only taxed at 10% (15% * 1000万円= 150万円 vs 10% * 1000万円 = 100万円, providing a difference of 50万円). So you can just multiply the full value times 15% and then subtract 50万円 to adjust the bottom part's rate.

(Again but for the next spot, 3000万円 * 20% = 600万円, but 3000万円 * 15% = 450万円, so there's a difference of 150万円 ... plus the difference between taxing the first 1000万円 at 15% vs 10% = 200万円)

Discussions on proper calculations :

2023-01 - UK calculation example

2022-06 - Large USD calculation

2021-10 - US calculation example

Early inheritance system

The "early inheritance" scheme offers an expanded tax-free gift allowance (lifetime allowance of 25 million yen) and beneficial tax rates to children who elect to be taxed on gifts received from their parents at the time of their parent's death. It's a way to effectively tell the tax office, "this is an advance on my inheritance so please tax me as if it was an inheritance, not a gift". Again, it is necessary to file a gift tax return to access this scheme.

The details are here : https://www.nta.go.jp/taxes/shiraberu/taxanswer/sozoku/4103.htm

See also this comment.

Optimization strategies

There is no "one simple trick" to avoiding inheritance tax. Neither trusts nor family companies are especially effective. The most common recommendation is to maximize the use of the tax-free gift allowance to reduce the size of the estate prior to death.

The normal inheritance tax minimization strategies include : take advantage of your annual tax-free gift allowance, receive gifts in excess of the allowance where the resulting tax burden would be lower than if you received the asset at the time of inheritance, use the early inheritance system if the asset you will inherit is expected to increase significantly in value before inheritance occurs, adjust the composition of the estate based on Japanese asset valuation rules (e.g., lower valuations for real estate, especially residential property), take advantage of the special-purpose tax-free gift schemes (gifts for residential housing acquisition, child-raising, educational expenses), etc.

For assets well above the standard deduction (30M+6M per statutory heir), receiving some inheritance when each parent passes instead of waiting for the full inheritance when the last one passes allows to benefit twice from inheritance deduction as well as the progressive nature of inheritance tax rate. Doing the tax calculation for a single inheritance, then for two instead, can show a significant gap.

Leaving Japan to avoid paying inheritance tax might be a valid strategy for some.

Professionals

This does not constitute a recommendation.

Chester Tax is 'a major tax accountancy firm that specializes in inheritance tax'