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Inheritance and gift tax changes for January 2015
Impact to middle-class may be unwise

Nobutake Yokata
Professor, Faculty of Commerce, Waseda University

The inheritance tax and gift tax will increase in January 2015. This increase is expected to affect people who have not had to pay inheritance tax up until now. I would first like to provide a brief outline on inheritance tax and then look at the current situation and challenges faced.

There are different taxation formulas, and inheritance tax can be calculated based on an estate tax formula or an estate acquisition tax formula. The estate tax is levied on the party leaving behind assets, while the latter is a based on the amount of the estate acquired by the receiving party. A progressive tax rate structure is usually applied for inheritance tax, and because the tax burden varies based on the degree of distribution, an asset acquisition tax formula serves to promote asset distribution and control the concentration of wealth in society. However, there is a risk of promoting estate distribution, as it becomes difficult for farmers and small and medium-size enterprises (SMEs) to preserve family-run businesses. Based on the Report on Japanese Taxation by the Shoup Mission that served as the basis for taxation in Japan after World War II, inheritance tax system reforms implemented in 1951 made a switch from an estate tax formula to an estate acquisition tax formula and also integrated the inheritance tax and gift tax to create a lifetime accumulated acquisition tax base. However, on the grounds that people in Japan were unfamiliar with the acquisition tax formula which assumed that assets would be distributed through inheritance, another reform was implemented in 1958, which changed to a hybrid tax formula of an estate tax and an estate acquisition tax.

Assets subject to inheritance tax include real estate such as land and property, financial securities and cash deposits. Real estate appraisal for inheritance tax is considerably lower than the market value, and there are also reduction measures for small residential land plots, giving real estate a relative advantage (more protection) compared to financial assets. The current standard deduction (minimum amount exempt from taxes) is: 50 million yen + 10 million yen × the number of legal heirs. Taxes can be calculated by finding the total taxable estate (subtract the standard deduction from the estate amount), calculating the preliminary tax amount (applying a progressive tax rate of 10 to 50% for each acquisition amount if in accordance with the legal heir amount). The total of these is the total inheritance tax amount.

Currently, inheritance tax only applies to some wealthy people, and the tax burden is not very high. The taxation ratio (the percentage of the deceased for which taxation applies) in 2011 was approximately 4.1%. While this reached 7.8% in 1987, an attempt was made to alleviate the sudden increase in the tax burden accompanying skyrocketing land prices during the Bubble period. Taxes were reduced by increasing the standard deduction and expanding various exceptions such as those for small residential land plots as part of a comprehensive tax system reform. Furthermore, as a result of revisions during FY2003 such as a reduction in the maximum tax rate, the inheritance tax burden has been significantly reduced.

Meanwhile, despite the fact that land prices have dropped to pre-bubble levels and other asset prices have normalized, there has been no reduction in the standard deduction. In this way the inheritance tax burden has been limited, further resulting in degradation of the asset redistribution function and the function of inheritance as a means of finance. The inheritance tax burden rate, that is the ratio of the collected amount to the taxable amount of inheritances, was 11.6% in 2011, about half of the rate in 1991 (22.2%). In addition, in terms of the taxation by estate size, the category of estates over 1 billion yen, 1.4% of all tax payments, accounted for 32% of the collected tax amount, reflecting the concentration of the inheritance tax burden mostly on a small group of wealthy people.

With the normalization of land prices and the recent rise of stock values, the ratio of assets accounted for by financial products has increased. In addition, the ratio of assets held by the elderly has increased with the advance of population aging and a rise in the age of asset transfer. With the expansion of the social security system, supporting elderly people that had been supported by families in the past has been socialized, and the fact that the society overall has been providing support for elderly people based on public policy measures has contributed to the stabilization of elderly people's finances. Older households have more assets, and inequality is apparent. Meanwhile, as the number of inheritors decreases with the declining birthrate, it is likely that the amount of assets acquired by each inheritor will increase going forward. A situation is arising in which wealth disparity within the elderly generation is being passed on to the next generation through inheritance.

In response to this situation, in order to restore the asset redistribution function of inheritance tax to prevent the entrenchment of disparities across generations, and also from the viewpoint of achieving a balance with the socialization of support for the elderly, it may be necessary for the inheritance tax burden to be expanded to some degree beyond a group of wealthy people.

The main amendments to the inheritance tax system scheduled for January 2015 are: 1) a reduction in the standard deduction for estates; and 2) a revision to the tax rate structure. The current standard deduction of 50 million yen + 10 million yen × the number of legal heirs will be reduced to 30 million yen + 6 million yen × the number of legal heirs. As this will expand the tax base, it is expected that the taxation ratio will increase from the current 4% to 6% (and from an average of 9.6% to 14.4% for Tokyo’s 23 wards). The impact will be especially large in large metropolitan areas, where it is said that simply owning a detached house will result in having to pay inheritance tax.

A progressive rate is applied to inheritance tax, and the number of tax brackets will be changed from six to eight, for the purpose of shifting the tax burden to focus on people acquiring expensive estates. The maximum tax rate will be increased from 50% to 55% for the 600 million yen or more bracket, while the 100 million yen to 300 million yen bracket will be split and the tax rate increased from 40% to 45% for the 200 million yen to 300 million yen segment. Note that along with inheritance tax, the number of brackets for gift tax will also be increased to eight and the maximum tax rate increased to 55%.

While lowering the standard deduction is effective from the perspective of expanding the tax base, it seems harsh to reduce it by 40% in a single stroke, and perhaps it would have been better to reduce it gradually as a mitigation measure. On the other hand, the revision of the tax rate structure is somewhat halfhearted. Considering that in the past the maximum tax rate was 75% and that the maximum tax rate of 70% was lowered to 50% all at once during the tax system revisions in FY2003, not much of an improvement in the asset redistribution effect can be expected merely with an increase in the rate to 55% and an increase in the number of brackets. Of course, high income earners may have various means of reducing taxes and a wide variety of tax-saving strategies. While increasing the tax rate too much could lead to tax avoidance, it seems preferable to get rid of loopholes while further increasing the tax rate.

Nobutake Yokata
Professor, Faculty of Commerce, Waseda University


Born in 1945, Professor Yokota graduated from the Waseda University School of Commerce, received a master's degree from Columbia University, and completed the doctoral course requirements of Waseda's Graduate School of Commerce. He specializes in public finance and tax theory. His major publications include A Discourse on Public Finance [Zaiseigaku Kogi] (2000, Chuokeizai-sha, co-authored) and An Introduction to Business Economics [Nyumon Bujinesu Ekonomikusu] (2006, Chuokeizai-sha, co-authored).