Calculation of Japan Estate Tax is not simple.
Here are two important takeaway. First, Inheritance Tax will be imposed on Heirs and Donees (each individual or entity who receives assets), Not Estates (Decedents) or Donors.
Second, Tax amount is calculated based solely on the assumption that statutory heirs would receive the assets according to the statutory share of the heirship regardless of whether the assumption matches the way the estate is actually distributed. Suppose there were decedent with four children [a,b,c,d]. If the decedent designated all his asset to one child [a], this child [a] would be responsible for paying all the inheritance tax. But the amount of tax would be calculated based on the assumption that each child would receive equal amount of asset (25% each) from the decedent according to the Japan Inheritance Law.
Here is the Example:
Decedent: Died in 2019.
Asset Total: 600,000,000 JPY (Including Life Insurance Proceeds of 100,000,000 JPY to Wife).
Debts: 100,000,000 JPY
Family: Wife, 2 Children.
Decedent had a Will: Asset 400,000,000 to Wife, 100,000,000 to Each Child. Debts 100,000,000 to Wife.
1. Calculation of Taxable Asset.
Taxable Asset = Gross Estate - Tax-Exempt Properties. Gross Estate = Total FMV of Assets at the time of death (BUT there are certain exceptions such as properties used for Residence or Business of the heirs, etc.). Tax-Exempt Properties are the followings:
Graves, family altars, rituals;
Properties donated to Federal Government, Local Government, and certain charitable organizations (in such case, some specific process will be required. );
Proceeds from Life Insurance (death benefit) to the extent of the following amount: 5 million JPY x Number of Statutory Heirs; and
Retirement allowance for death to the extent of the following amount: 5 million JPY x Number of Statutory Heirs.
Here, Gross Estate is 600,000,000 JPY. Tax-Exempt Property is 15,000,000 (= 5,000,000 JPY x 3 (Number of Statutory Heirs) of Life Insurance Proceeds. Thus, Taxable Asset is 585,000,000 (Gross Estate (600,000,000) - Tax-Exempt Properties(15,000,000)).
2. Calculation of Net Taxable Asset.
Net Taxable Asset = Sum of Individual Net Taxable Asset. Individual Net Taxable Asset = Individual Taxable Asset - Individual Liabilities - Individual Funeral Expenses + Properties Donated to the Individual Within 3 Years Before Death. Here, Individual Net Taxable Asset of Wife is 285,000,000 (= 385,000,000 (Individual Taxable Asset) - 100,000,000 (Liabilities) - 0 (Funeral Expenses) + 0 ( Properties Donated within 3 years before death). Individual Net Taxable Asset of Each Child is 100,000,000 (= 100,000,000 (Individual Taxable Asset) - 0 (Liabilities) - 0 (Funeral Expenses) + 0 ( Properties Donated within 3 years before death)). Net Taxable Asset is equal to 485,000,000 (= 285,000,000 + 100,000,000 + 100,000,000).
3. Calculation of Total Taxable Base.
Total Taxable Base = Net Taxable Asset - Basic Exclusion Amount. Basic Exclusion Amount = 30 million JPY + 6 million JPY x Number of Statutory Heirs. Here, Basic Exclusion Amount is 48,000,000 (= 30,000,000 + 6,000,000 x 3). Thus, Total Taxable Base will be equal to 437,000,000 (= 485,000,000 - 48,000,000).
4. Calculation of Hypo-Individual Taxable Base
Hypo-Individual Taxable Base = Total Taxable Base x Statutory Portion of Heirship. Statutory Portion of Heirship is the followings:
If the heirs are your Spouse and Child(ren): Spouse 50%, Children 50% (Divided Equally by Children);
if the heirs are your Spouse and Parent(s): Spouse 2/3, Parent 1/3 (Divided Equally by Parents); and
if the heirs are your spouse and siblings: Spouse 3/4, Siblings 1/4.
Here, each Statutory Portion of Heirship will be Wife 50%, Each child 25%. Thus each Hypo-Individual Taxable Base will be Wife 218,500,000 (= 437,000,000 x 50%), each Child 109,250,000(= 437,000,000 x 25%).
5. Calculation of Gross Tax Liability Gross Tax Liability = Sum of Gross Hypo-Individual Tax Amount. Gross Hypo-Individual Tax Amount = Hypo-Individual Taxable Base x Marginal Tax Rate. Marginal Tax Rates are the followings (or you may find your tax liability by simply multiplying the Hypo-Individual Taxable Base by the rate which is applicable to the highest range and subtracting the numbers in parentheses): • Up to ¥10 million ..................... x 10% • ¥10 million - ¥30 million ......... x 15% ( - 500,000) • ¥30 million - ¥50 million ......... x 20% (- 2,000,000) • ¥50 million - ¥100 million ....... x 30% (- 7,000,000) • ¥100 million - ¥200 million ..... x 40% (- 17,000,000) • ¥200 million - ¥300 million ..... x 45% (- 27,000,000) • ¥300 million - ¥600 million ..... x 50% (- 42,000,000) • Over ¥600 million .................... x 55% (- 72,000,000) Here, Wife’s Gross Hypo-Individual Tax Amount is 71,325,000 (= 218,500,000 x 45% - 27,000,000). Gross Hypo-Individual Tax Amount of each child is 26,700,000 (= 109,250,000 x 40% - 17,000,000). Gross Tax Liability is 124,725,000 (= 71,325,000 + 26,700,000 + 26,700,000).
6. Calculation of Real-Individual Tax Liability. Real-Individual Tax Liability = Gross Tax Liability x (His/Her Individual Net Taxable Asset / Net Taxable Asset). Here, Wife’s Real-Individual Tax Liability is 73,292,010 (= 124,725,000 x 285,000,000 ( Individual Net Taxable Asset) / 485,000,000 (Net Taxable Asset). Each Child’s Real-Individual Tax Liability is 25,716,494 (= 124,725,000 x 100,000,000 ( Individual Net Taxable Asset) / 485,000,000 (Net Taxable Asset).
7. Calculation of Final Tax Liability.
Final Tax Liability of Each Heir = Real-Individual Tax Liability - Tax Credit.
Here are some examples of Tax Credit.
[Spousal Credit]:
Spouse may claim his/her tax credit. The amount of Spousal Credit will be the followings:
Spousal Credit = Gross Tax Liability x Lesser of [Amount A] or [Amount B] / Net Taxable Asset.
[Amount A]: the greater of 160,000,000 or Net Taxable Asset x Statutory Portion of Heirship.
[Amount B]: Individual Net Taxable Asset of spouse.
[Foreign Tax Credit]:
You may also claim the Foreign Tax Credit. If you acquire a property located in another country by inheritance or bequest, you can deduct the amount equivalent to the amount of inheritance tax imposed against the property according to the tax law of the country.
[Other Tax Credit]: There are other Tax Credit such as Tax Credit for Minors, Disabilities, etc. Here, the Spouse can deduct the amount of Spousal Credit which is equal to 62,362,500 (= 124,725,000 (Gross Tax Liability) x 242,500,000 (= Lesser of 242,500,000 ([Amount A]) or 285,000,000 ([Amount B])) / 485,000,000 (Net Taxable Asset)). Therefore, Final Tax Liability of Wife will be 10,929,510 (= 73,292,010 - 62,362,500). Final Tax Liability of each Child will be 25,716,494.
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