How to Prepare Inheritance Tax Returns

Preparation of inheritance tax return

Inheritance tax is a tax that arises when the amount of a decedent’s estate exceeds a certain amount when the estate is inherited by inheritance or will. Inheritance tax must be declared to the tax office according to a prescribed form. The deadline for filing an inheritance tax return is within 10 months from the day following the day on which the taxpayer became aware of the commencement of inheritance. An inheritance tax return must be prepared and submitted to the tax office within 10 months of the date of death. The deadline for payment of inheritance tax is also the same as the deadline for filing an inheritance tax return. During this period, you must discuss the division of the estate, prepare an inheritance tax return, and prepare the taxes to be paid. If you miss this period, you may be subject to an additional tax for not filing and a delinquent tax.

Calculation of Inheritance Tax

The amount of inheritance tax for each individual is calculated by first multiplying the total taxable estate, which is calculated by deducting the basic allowance from the total net estate, by the inheritance tax rate to calculate the overall amount of inheritance tax according to the statutory inheritance share, and then dividing the amount of inheritance tax for each individual by the amount of property actually acquired through the division of the estate. The specific order of calculation is as follows:

Calculation of Net inheritance

The net estate is calculated by adding the amount of the decedent’s inheritance at the time of death, the amount of the deemed inheritance, the amount of gifts made within the past three years from the date of death, and the amount of gifts made under the taxation system for the settlement tax at the time of inheritance, and then subtracting the tax-exempt property, the decedent’s debts, and funeral expenses. The decedent’s estate includes cash, savings, stocks, real estate, golf club memberships, copyrights, patents, precious metals, and rights as a creditor. Deemed inherited property is that which is not included in inherited property under the Civil Code, but is included in inherited property when calculating inheritance taxes, and typical examples are death insurance and retirement allowance on death. However, death insurance and death benefits are exempt from tax up to the amount calculated as 5 million yen x the number of legal heirs, and tax is imposed on the amount exceeding that amount. If a gift was received within three years of the decedent’s death, the amount of the gift is added to the inheritance. In addition, when using the taxation system for settlement at the time of inheritance when gifts are made from parents/grandparents aged 60 or older to children/grandchildren aged 20 or older, no gift tax will be imposed until the gift amount reaches 25 million yen, but the gifted amount must be added to the inheritance at the time inheritance begins. Tax-exempt property includes cemeteries, headstones, Buddhist altars, Buddhist altar accessories, and other property donated to the national or local government, as well as death insurance and retirement allowance on death in an amount calculated as 5 million yen x the number of heirs.

Deduction of Basic allowance

The total taxable amount is calculated by subtracting the basic exemption from the net estate. The basic deduction is calculated as follows: 30 million yen + 6 million yen x number of legal heirs. If there is one legal heir, the amount is 36 million yen; if there are two legal heirs, 42 million yen; if there are three legal heirs, 48 million yen; if there are four legal heirs, 54 million yen; and if there are five legal heirs, 60 million yen. Legal heirs include heirs who have renounced their inheritance. For example, if there is a 300 million yen estate, a 100 million yen debt, and a 50 million yen living gift within 3 years, the total taxable estate would be 300 million yen – 100 million yen (debt) + 50 million yen (living gift property) – 54 million yen (basic deduction) = 196 million yen.

Calculation of the amount of acquisition if divided by the legal inheritance share

To calculate inheritance tax, first calculate the amount each heir will receive, assuming that the total taxable estate is divided in accordance with the legal inheritance shares. In the above example, if the heirs are a spouse and three children, the amount acquired by each heir based on the statutory inheritance share would be as follows
Spouse: 196 million yen x 1/2 = 98 million yen
Children (each): 196 million yen x 1/2 x 1/3 = 32,666,600 yen

Calculation of inheritance tax if divided by legal inheritance share

Calculate the amount of inheritance tax based on the amount acquired if the property is divided according to the legal inheritance shares. The tax rate and deduction amount are determined by the amount of acquisition as follows:

Acquisition amount	Tax rate	Deduction amount
10 million or less	10%	0
10 million to 30 million or less	15%	500,000
30 million to 50 million or less	20%	2 million
50-100 million or less	30%	7 million
100-200 million or less	40%	17 million
200-300 million or less	45%	27 million
300 to 600 million or less	50%	42 million
600 million or more	55%	–

In the above example, the taxable amount on the legal inheritance share would be as follows
Amount of taxation on spouse’s legal share of inheritance
　＝98 million yen x 30% – 7 million yen (deduction) = 22.4 million yen
Amount of taxation on the legal inheritance share of children
　= 32,666,600 yen x 20% – 2,000,000 yen (deduction) = 4,533,320 yen
In addition, the total amount of inheritance tax from the above is as follows:
　22,400,000 yen + 4,533,320 yen x 3 persons = 35,999,960 yen

Calculation of the amount of inheritance tax for each heir

The total amount of inheritance tax is divided by the inheritance ratio of the property actually acquired by each heir. In the above example, if each person acquired the property in accordance with the legal inheritance share, the following would apply
Spouse’s inheritance tax: 35,999,960 yen x 1/2 = 17,999,980 yen
Inheritance tax for children: 35,999,960 yen x 1/2 x 1/3 = 5,999,993 yen
In this way, inheritance tax is divided by the amount actually inherited. For example, suppose that in the above example, the spouse gets one-half, while only A and B inherit from children A, B, and C, and C renounces inheritance. In this case, the inheritance tax for the spouse would be the same as above, but the inheritance tax amounts for children A and B would be as follows
Amount of inheritance tax for each of A and B
　35,999,960 yen x 1/2 x 1/2 = 899,990yen

Calculation of the actual amount of tax payable by each heir

Deductions and additions are made from each heir’s tax amount to calculate the amount of tax actually payable. Examples of deductions include the following, which are deducted in the following order:
(1) Gift tax credit
Gift property received from the decedent within 3 years prior to the decedent’s death is added to the estate, but if gift tax was paid, the gift amount is subject to double gift tax and double inheritance tax, so a certain amount of the gift tax is deducted from the inheritance tax.
(2) Spousal tax reduction
Spousal tax reduction applies to the spouse, so no inheritance tax will be imposed on the amount actually acquired by the spouse as a result of the division of the estate up to the greater of (i) 160 million yen or (ii) the amount equal to the spouse’s legal share of the inheritance. In this case, since the spouse only acquired up to the legal inheritance share, the amount of inheritance tax is zero. The spousal deduction requires certain conditions, the spouse to be a spouse on the family register, certain conditions not to have concealed assets, certain conditions to file an inheritance tax return, certain conditions and to have finalized the division of the estate.
(3) Minor’s Exemption
If the legal heir who received the property is a minor and has a domicile in Japan, a deduction of 100,000 yen is allowed for the number of years until the heir reaches 20 years of age x 100,000 yen.
(4) Deduction for disabled persons
If the legal heir who received the property is physically disabled and resides in Japan, he/she is entitled to a deduction of 100,000 yen (200,000 yen for the specially disabled) multiplied by the number of years until he/she reaches 85 years of age.
(5) Deduction for successive inheritance
If an inheritance occurs within 10 years of the date of inheritance, the heirs of the second inheritance are entitled to a certain amount of deduction.
(6) Inheritance tax credit for property abroad
If you inherit property located in a foreign country and have paid taxes in the foreign country that would otherwise be inheritance tax, you can deduct a certain amount from the inheritance tax.

Addition of inheritance tax amount

In the case of additions to the amount of inheritance tax, the amount of inheritance tax may be paid in addition to the amount of tax actually calculated. Specifically, if the heir is not a spouse or a blood relative within the first degree of kinship of the decedent (siblings or third parties), or if the heir is a grandchild of the decedent who was adopted by the decedent, the amount of tax actually paid will be added by 20%.

Obligation to pay inheritance tax jointly and severally

The Inheritance Tax Law provides that all persons who have acquired property from the same decedent by inheritance or bequest shall be jointly and severally liable to pay inheritance tax on the property acquired by inheritance or bequest up to the amount equivalent to the value of the benefit received from such inheritance or bequest. Thus, if one of the heirs fails to pay inheritance tax, all the other heirs are jointly and severally liable to pay the amount of inheritance tax owed by that person. If the inheritance tax is not paid by the due date, a delinquency tax and an interest tax will be added to the main tax, which must also be paid jointly and severally.

Gifts inter vivos

Gifts made during one’s lifetime have the advantage of reducing the amount of inheritance tax. If the amount of gift tax is less than the amount of inheritance tax, there is an advantage to making a living gift. However, there are a variety of inheritance tax exemptions, such as a special exception for small residential areas, a basic exemption, a spouse’s exemption, and a life insurance exemption, and in some cases the amount of inheritance tax may be lower than expected. If you are making a gift during your lifetime for the sole purpose of reducing taxes, you may want to calculate the actual amount of inheritance tax in advance before making the gift. There are several types of living gifts, for example:
(1) Calendar year gifts
If you make a planned gift of up to 1,100,000yen each year, no gift tax will be imposed. In addition, since the gift is not subject to reversal at the time of inheritance, no inheritance tax will be imposed on the donated amount in the future.
(2) Inheritance-time settlement taxation system
If you choose the taxation system for the taxation of gifts at the time of inheritance and notify the tax office, gift tax will not be imposed on gifts of up to 25 million yen in the aggregate. However, in the event of inheritance, the amount of the gift will be added back to the inheritance, and inheritance tax will be imposed on the amount equivalent to the gifted amount.
(3) Gifts of home acquisition funds and education funds
When gifts are made to children or grandchildren for home acquisition or education, it is possible to receive a reduction or exemption from gift tax. In the case of a gift of real estate, a change of name is required. In the case of a transfer of title due to inheritance, the registration and license tax is 0.4% and no real estate acquisition tax is imposed, whereas in the case of a gift, the registration and license tax and real estate acquisition tax are each subject to a 2 to 3% tax. In addition, if the donor dies within three years of the gift, the donated property will be included in the amount of the estate for inheritance tax purposes, which may not provide any tax benefits.