The greedy fingers of the Inheritance Tax
Japan’s inheritance tax had a major revision on January 1, 2015. The total deduction allowed was cut back by a whopping 40%. Previously, the total deduction stood at ¥70 million (¥50 million + [¥10 million x 2 heirs]). Say, if the deceased had two children, they would be exempt from any inheritance tax, as long as their parent’s estate fell within the maximum of ¥70 million. Currently, the total deduction has been hacked down to ¥42 million (¥30 million + [¥6 million x 2 heirs]). The lowered limits mean that a lot more properties will be captured and subjected to the progressive tax rates.
Will my children be taxed?
It is already complex enough to own overseas assets across multiple tax jurisdictions around the globe. Particularly, if you own property in Japan under your personal name, there’s more to think about. For foreigners living in Japan, the laws on inheritance and gift taxes can be a frustrating experience. This can often leave foreign taxpayers wondering whether they fall under Japan’s tax purview.
Foreign nationals with a jusho in Japan will be subject to the Japanese Gift and Inheritance Tax assessment. For now, jusho is taken to generally mean your address. Legally, there is no clear definition under Japanese law for what constitutes as jusho but it is generally understood to be a person’s ‘principal place of living’ as determined based on individual ‘objective facts and circumstances’.
Therefore, if you live in a property in Japan, you are deemed to have residency. According to Japan’s Inheritance Tax law, those with a domicile in Japan are subject to Japanese tax on all worldwide assets they inherit. Japanese inheritance taxes apply to all of an individual’s assets worldwide. This is a law which comes as an unpleasant surprise for non-citizens living in Japan when they are the beneficiaries of overseas assets. If a loved one who died, had a home in Japan at the time of their passing, and the person who inherits, has citizenship in Japan, all assets are wide open to Inheritance Tax, irrespective of location. Should a living relative have no home in Japan, nor Japanese citizenship, the Inheritance Tax still applies on all assets that are located in Japan. If you are a foreigner who has no domicile in Japan but owns real estate proprieties or Japanese stock, all that Japanese asset you leave to loved ones will be subject to the Inheritance Tax.
It is also worthwhile to note that Japanese Inheritance Tax rates are progressive. It hits 55% at the top end (taxable amount > 600 million yen). If you are well-heeled, the Japanese will want a substantial share of your hard-earned investment returns.
What does all this mean for foreigners buying properties in Japan?
For starters, read up about your Gift/Inheritance Tax exposure as individual liability varies according to your personal financial situation. It is recommended that you seek professional advice from your accountant or tax professional to help you navigate the many rules, regulations and intricacies of Japanese tax laws.
Careful titling of your acquired properties may also minimize your Inheritance Tax exposure.
Having said that, The Solution to buying Japanese real estate under a Company structure would easily solve the Gift/Inheritance Tax problem.