Get Your Affairs in Order – Inheritance Tax & Gift Tax in Japan

Getting your affairs in order

For British nationals residing in Japan, navigating the nation’s gift and inheritance taxes has never been more important, particularly amid the global coronavirus pandemic. The British Chamber of Commerce in Japan (BCCJ) therefore kicked off the first in its new event series on Estate Planning, on August 4.

In a webinar entitled, “Get Your Affairs In Order: Inheritance Tax & Gift Tax,” experts from PwC Japan provided an overview of Japanese gift and inheritance taxes, and addressed issues concerning inheritance and wills, all of which is relevant to anyone living in Japan.

 

Inheritance tax

With Japan’s inheritance tax rate as high as 55% (typically 40% in the UK) and gift taxes as high as 55%, there are plenty of reasons to get your estate in order and ensure less of a financial burden for beneficiaries following your departure.

Thomas Y. Lu, senior manager, PwC Tax Japan, noted some changes for the better since PwC’s previous webinar on the same topic three years ago.

Following lobbying, the Japanese government reduced the impact of Japanese gift and inheritance tax for foreigners, principally those with a work-related visa who have resided in Japan for not more than 10 of the past 15 years.

Previously, any foreigner who resided and died in Japan after spending more than 10 years in the country faced having inheritance tax applied to both their Japanese and foreign assets, a rule blamed for discouraging foreign talent from working in Japan.

“One big takeaway is that the type of visa you’re holding will have an impact on your Japanese gift and inheritance tax and Japan exit tax,” Lu said, pointing out that permanent residents face an increased gift and inheritance tax exposure than foreigners on short-term work permits.

Further changes (effective from 2021) also allow gifts/inheritances to be made to individuals residing in Japan for less than 10 years out of the last 15 years under a work-related visa by foreign nationals who have resided in Japan under a work-related visa (regardless of the length of time the transferor has resided in Japan under a work-related visa).

Bradley Tutt, manager, PwC Tax Japan, noted some key factors in Japanese gift and inheritance tax include the burden falling on the recipient; the tax being imposed at the time of death or time of gift; and high rates compared to other overseas jurisdictions.

“There is no concept of joint bank accounts and no rollover if one of those individuals passes away. There are potential issues if you’re putting money into a joint bank account since it could be potentially construed as a gift by the Japanese tax authorities,” he said.

However, there is a general annual exemption of ¥1.1mn per recipient for gift tax. For inheritance tax, the basic exemption is ¥30mn plus ¥6mn per statutory heir. A spousal credit also exists, usually the higher of ¥160mn or 50% of the tax, Tutt said.

“There is also potential for foreign tax relief, if you’ve paid foreign taxes on gift or inheritance on foreign assets in a different jurisdiction,” he added.

Foreign residents need to determine if they are a “limited” taxpayer, only subject to gift or inheritance tax on the receipt of assets located in Japan, or an “unlimited” taxpayer, subject to gift and inheritance tax on all worldwide assets. The former is largely those considered temporary residents (less than 10 years) while the latter includes those who hold a Table 2 visa status (permanent resident and spouse of Japanese national visas are two common examples) or have resided in Japan for longer than 10 years out of the last 15 years.

“Any planning you might have done in the UK or other jurisdiction might not be effective in Japan,” Tutt said. “There is also no unlimited transfer of assets between spouses in Japan, unlike in the UK, with a cap in Japan of about £1mn.”

 

Exit tax

Foreign residents carrying a Table 2 visa considering a permanent departure from Japan also need to assess their potential exposure to exit tax.

Such taxes are levied on unrealised capital gains from financial assets, such as shares, calculated at time of departure, principally on individuals with financial assets exceeding ¥100mn and individuals residing in Japan for more than five of the past 10 years (for foreign nationals this rule only applies if one has carried a Table 2 visa for more than five of the past 10 years before departure).

The exit tax can also be imposed when financial assets are inherited or gifted to a non-resident.

“If you are subject to the exit tax, there’s potential for cash flow issues to arise, as you will need to fund the tax liability. Alternatively, it can be deferred, but you may need to provide collateral to the Japanese tax authority, so it’s quite a complex area, which needs to be considered if you are planning to depart Japan,” Tutt said.

 

Will types

Kotaro Okamoto, director, PwC Legal Japan, stressed the importance of preparing a will. He outlined the different types of will under Japanese law.

The general recommendation is a notarised document, since “there is minimal risk of forgery and it is possible to transfer assets and registration very smoothly,” he said, although such a will must be drafted in Japanese, potentially requiring the use of a translator.

For those with assets in multiple countries, the recommendation is that the will should be prepared in each jurisdiction of the location of the assets and the will should state which assets to which it applies. It should also provide for heirs living outside Japan, to prepare for an important issue in relation to inheritance tax, joint liability among heirs.

For those with trust assets outside Japan, analysis of trust may be needed to understand inheritance tax consequences in Japan.

Asked how inheritance tax could be minimised, the panellists noted real estate investments tended to attract lower valuations than cash or securities for the purposes of asset valuation.

“You shouldn’t wait until the last moment. It’s best planning ahead how to divide up your assets. During your lifetime you can start gifting and making transfers,” Lu said.

 

Seek advice

Attendees also raised a wide range of other issues including joint ownership, gifting of assets from overseas to Japan residents, the applicable law for foreign nationals (generally the country of citizenship), bilingual wills and best practice for LGBTQ residents.

The panellists suggested seeking out professional advice to find out how attendees could best address their own personal circumstances.

Indeed, with tax and estate planning an increasingly complex issue, consulting an expert could be key to achieving the right outcomes well before your final departure. And for those not already prompted, there is no time like the present, judging by the issues raised during the event.

The information provided during the webinar and in this article is accurate as of August 4, 2021 (the date of the webinar), however, tax law is subject to ongoing change and updates.