Like many other countries, Japan charges taxes from properties and/or items that inherited or obtained as a gift. For example, if you have inherited or received real estate, large money sums or expensive items, you must pay taxes to the state. In this guide, you will find all the necessary information to understand the basics of the inheritance and gift tax.
What is the Inheritance and Gift Tax?
This is a tax that a person must pay for becoming an owner of the property, money or items after someone’s death (inheritance) or after accepting them as a gift from someone else. If the total taxable value of inheritance or gift is more than the non-taxable minimum (we will talk about it further), the law requires the recipient, also called donee or heir, to pay a certain percentage of that value to Japan as a tax.
What can be inherited?
Usually inheritance comes in form of real estate, money, or valuable items. But some of the possible examples may include:
In general, inheritance taxes apply to property, money, or assets. The following types of properties might be included in a Japanese inheritance:
- Bank deposits
- Loans
- Shares in a bond or company
- Insurance proceeds
- Retirement allowances
- Investment interest
- Trade receivables
- Japanese government bonds or foreign government bonds
- Patents, copyrights, and trademarks
- Ship or aircraft
- Mining or quarry rights
- Fishing concession rights
Basic Exemption
The following properties are considered tax-exempt:
- For inheritance that commenced on or before December 31, 2014, the amount of basic exemption is JPY 50 million plus JPY 10 million multiplied by the number of statutory heirs.
- For inheritance commencing on or after January 1, 2015, the amount of basic exemption is JPY 30 million plus JPY 6 million multiplied by the number of statutory heirs.
- Family altars, graves, rituals.
- Donations to local government, charitable institutions and foundations.
- Life insurance proceeds up to JPY 5 million per statutory heir.
- Retirement allowance up to JPY 5 million per statutory heir.
- JPY 100,000 multiplied by the heir’s age for minor heirs under the age of 20.
- JPY100,000 multiplied by the heir’s age for heirs with disabilities (JPY 200,000 for special disabilities).
- Foreign tax credits.
Moreover, since the value of property is market mainly (as much as 70%) by the location, mortgage amounts can be also deducted from property value. Thus, if you are still paying mortgage and pass it on to your heirs, you can actually get a negative property value when it comes to taxes. This scheme makes housing investment an attractive way to pass on the heritage.
Revisions of the tax law
In an attapts to make the Inheritance and Gift Tax fair and balanced for everyone, Japan has made several amandments to it. Depending on the time of commencing, different rules apply. Thus, see the information below, to find out which revision of the law is applicable to your case.
Tax amendments of 2013
Before 2013, those with jusho (a permanent address) outside Japan were so-called “limited taxpayers” (as opposed to “unlimited taxpayers” with jusho in Japan). Taxes were charged only if the assets were in Japan at the moment of donor’s passing away and living the inheritance (or a gift). To avoid paying taxes on their overseas assests, some Japanese citizens started renouncing their Japanese citizenship. The government has taken actions.
Thus, starting April 2013 the recipients of inheritance also became “unlimited taxpayers” if the donor had a jusho in Japan. It means that as a hire you will have to pay tax on inheritance if the donor has had a jusho in Japan for a while at some point in life. Technically speaking, even short-term residents could have unwillingly made their heirs pay taxes to Japan should they happen to, let us say, pass away while having a jusho there.
This move draw a lot of criticism. Foreign investors became very reluctant to come to Japan since Japan reserved the right to claim taxes on any of their assets worldwide. The new round of amendments came in 2017.
Tax amendments of 2017
Japan has set the 10-year time frame for “temporary foreigners” who do not have to pay taxes on overseas assets. If a person lived in Japan for 10 years or less during the last 15 years, he or she would have to pay inheritance taxes on Japanese assets only. This so-called 5-year tail was supposed to give enough flexibility for foreigners to manage their assets. However, permanent residents, long-term residents as well as spouses and children of Japanese nationals with jusho in Japan were liable at all times for both Japanese and overseas assets.
As surreal as it might be, under certain circumstances a non-Japanese citizen is obliged to pay taxes to Japan for inheritance or gift that is outside Japan from a non-Japanese citizen who does not live in Japan anymore. Experts agreed that such conditions were discouraging foreign citizens from coming to Japan and working and residing here on a long-term basis or investing in property.
Things also got more complicated because due to the fast switch in regulations heirs found themselves caught in between two sets of rules and unsure whether they need to pay taxes to Japan or not.
In an attempt to alleviate the burden, Japan has introduced a grace period.
Those donors who have permanently moved out of Japan after the residence of 10 or more years before April 1, 2017, as well as any inheritance and gifts received in between April 1, 2017 and March 22, 2022, are spared from the “5-year tail” rule.
Once again, the government of Japan tried to figure out better ways to attract foreign investors by relaxing the regulations even further.
Tax amendments of 2018
The new amendments brought two major changes:
- Properties located outside Japan became non-taxable in principle.
- Period of residence outside Japan after a continuous stay in the country for foreign donors had been shortened to 2 years instead of 5 (2-year tail).
Changes have also relaxed regulations for Japanese nationals. According to the 2018 revision, heirs who are Japanese citizens but have not resided in Japan during the past 10 years out of 15 are free from inheritance and gift tax for properties located outside Japan.
The scope: who must pay the Inheritance Tax?
In Japan, inheritance taxes are paid by the recipient. It means that the total value of the inheritance will be divided between statutory heirs. Then, each of the heirs will pay taxes in correlation to the received amount.
Three things that influence tax liabilities are donor’s and donee’s nationalities, their residance address and the property location.
Here is a chart by Shinsei International Tax Co to help you find out if you must pay this tax.
If you are a foreigner in living in Japan (having a jusho), here is what it means for you:
- Japanese assets are always taxable.
- Overseas assets are non-taxable in principle for short-term foreigners (living in Japan for less than 10 years).
- Overseas assets are taxable for long-term foreigners (living in Japan for more than 10 years).
- Overseas assets are taxable for those who lived in Japan for 10 years or more our of past 15 years, then moved out of the country, but still falls under the “5-year tail” or the “2-year” tail rule when moving back to Japan depending on the version of the law revision.
The Amount of the Inheritance Tax
in Japan, inheritance taxes are paid by the recipient. It means that the total value of the inheritance will be divided between statutory heirs. Then, each of the heirs will pay taxes in correlation to the received amount.
The tax progression for inheritance goes as shown below:
- Less than JPY 10 mln 10%
- JPY 10 mln – JPY 30 mln 15%
- JPY 30 mln – JPY 50 mln 20%
- JPY 50 mln – JPY 100 mln 30%
- JPY 100mln – JPY 200 mln 40%
- JPY 200 mln – JPY 300 mln 45%
- JPY 300 mln – JPY 600 mln 50%
- More than JPY 600 mln 55%
Taxation methods for Gift Tax
Gift tax has two taxation methods: calendar year taxation and taxation for settlement at the time of inheritance.
Calendar year taxation
Donated properties whose value exceed the basic exemption of 1.1 million yen are subject to gift tax. This covers the total value of all items received from January 1 to December 31 of that year. Gift tax will not be imposed if the total value of the items donated to you in a year do not exceed the basic exemption – that is, you are not required to report and file a return for gift tax in this case.
Taxation by settlement at the time of inheritance
In this system, the gift tax is imposed after the total value of the properties donated in a calendar year are subjected to a special deduction of 25 million yen. The taxpayer can apply for the deduction when he or she files a return for the gift tax by a particular due date prescribed by law.
This system is applied when parents or grandparents aged 60 years and older donate property to their grandchildren or children who are at least 20 years old. To select this system of taxation, the taxpayer needs to file a return for gift tax between February 1 and March 15 of the following year.
Once the taxpayer selects this system, it will be applied to all properties donated by the same donor from the year when it was selected. Once you select this system, you cannot change it to a calendar year taxation system. Should the donor pass away, an inheritance tax will be computed by adding the market value of the properties at the time of donation to the value of the estate.
Eligibility
As earlier mentioned, for one to be able to select the taxation system for settlement at the time of inheritance, the donor must be parents or grandparents who are at least 60 years and the receiver is also the presumptive heir or grandchildren of the donor’s children or grandchildren. The receiver should be at least 20 years as of January 1 of the year when the property will be handed over for donation.
There are no restrictions as to the type of properties or assets that can go under this system. The donor may also donate any value of a property as frequently as needed.
Calculating the Tax Payment
Under this system, the inheritance tax is derived from deducting the amount of the gift tax that has been paid previously fro the amount of the inheritance tax when the donor passed away. The inheritance tax is based on the sum of the value of the properties that were donated and the value of the properties acquired by bequest or inheritance.
Application of the Taxation System for Settlement at the Time of Inheritance
The recipients of the property are required to submit the “Report on the Selection of the Taxation System for Settlement at the Time of Inheritance” to the Tax Office which has jurisdiction over their address.
Filing the Tax Return and Payment
The person receiving the donation must file a return and pay the gift tax between February 1 and March 15 of the following year. It is also still necessary to file a return by these dates even when there is no tax to be paid particularly if the individual elects for the taxation system for settlement at the time of inheritance.
Taxes are generally paid in cash but individuals may apply for postponement of tax payment. This allows the taxpayer to pay the amount due in installments over a set number of years. To postpone tax payment, he or she must submit the pertinent application forms and other supporting documents to the District Director of the Tax Office by a certain due date.
Exemption for Spouse
A residential property or money that is to be used for purchasing residential property may be subject to a special provision when donated between a couple who have been married at least 20 years. This special provision includes a basic exemption of 1.1 million yen and up to 20 million yen (exemption for spouse).
Application Requirements
To be eligible for this special provision, the following requirements must be fulfilled:
- The asset was donated between a couple after they have been married for more than 20 years
- Upon receipt of the donation, the recipient should live in the property that was acquired by donation my March 15 of the year following the year of donation. He or she should continue to live in the said residential property.
This special exemption for spouses can only be used once from the same spouse.
Applying for the Special Provision
To apply for the special exemption, the recipient should file a return for the gift tax and attach the following documents:
- Family register or an extract that was created within ten days from the date of receipt of the donation
- Copy of the supplementary family register
- Certificate of registered information of the property and other supporting documents that certify that the recipient has acquired a residential property
If the actual residential property was received, the recipient should also attach the certificate of fixed asset evaluation and other similar documents.
Summary
Inheritance Tax and Gift Tax are levied on properties that are handed over to heirs and recipients. It should be noted that not all properties may be subject to these taxes. If the total value of the properties received in a year does not exceed the base exemption amount, there is no need for recipients and statutory heirs to file the return for gift tax or inheritance tax.
Inheritance Tax and Gift Tax FAQs
Are inherited estates located in other countries subject to inheritance tax for foreign nationals residing in Japan?
Foreign nationals who have residency status in Japan are required to file a tax return and make tax payments for all inherited estates from a decedent who is a resident or used to be a resident of Japan. This includes properties that are located outside Japan.
What if I do not report my overseas assets?
Since the majority of legislation on the overseas assets is in Japanese, it is possible that someone did not pay the appropriate taxes due to not knowing about the changes in the legislation. If it is ruled out that non-payment happened unintentionally the presumed payer can get get lighter penal.
However, if one has intentionally and knowingly not inform the authorities about the assets and did not pay the taxes such a person might be fined with 500 000 JPY or sentenced to a 1 year in prison.
What is a 5-year tail rule and should I be concerned about it?
In 2018, the legislation on taxes has been amended and a so-called “5-year tail” rule was canceled as of March 28, 2018. And as of April 1, 2018, it is also applicable to foreigners who permanently depart Japan but had a permanent residence address (jusho) in Japan for 10 out of the last 15 years. These residents were previously referred to as “not short-term foreigners”.
However, if the former not short-term foreigner returns to Japan and re-establishes a permanent address within two years of his/her permanent departure from Japan, then any assets gifted by him/her during this period will be subject to Japan gift tax as explained by PwC.
I am out of the country and do not have resident status in Japan but I inherited properties in the country. Am I still required to pay taxes
All domestic assets are taxable income. Non-resident heirs who acquire properties in Japan by inheritance or bequest are required to pay inheritance taxes.
Can I appoint another person or company to handle the filing and payment of my inheritance tax on my behalf?
In general, you can appoint a tax representative or agent to handle your tax returns on your behalf, particularly if you are a foreigner or based outside Japan.