There are many strategies that can be adopted to reduce inheritance taxes. The following are ten recommended steps to reducing inheritance tax in Japan.
1) First estimate your tax based upon your current situation and then see how the amount of tax would be effected if certain conditions are met. List out the effect on tax for each possible condition. By doing this you will be able to make a more informed decision. For example, if you take over your paren’t or in-law’s home and live their with your resident address, you will eligible to receive an 80 percent discount on the valuation of the land.
2) Some tax benefits are only available if the division of the estate is agreed to by the tax filing deadline (10 months). For example, it is necessary to have an agreement of the estate division and actually live there by the deadline of the filing in order to qualify for the above mentioned 80% discount on the land valuation. Thus, it is recommended to prepare an agreement in advance among heirs.
Possible options to reduce tax
The below are real feasible steps to reduce the inheritance tax. Some require the establishment of a company.
1) Purchase life insurance using the parents’ money. The money received from insurance is still to be counted as taxable base, but you will get deduction of the taxable asset by 5 million yen times number of heirs. If the insurance money is 30 million yen, which should be close to the amount that was paid from the decedent money, you have already reduced taxable base by 20 million yen (presuming that the number of heirs is 4 for example).
2) Make a gift to heirs every year. Each person can give a tax free 1.1 million yen gift per year to their heirs and others. This will steadily reduce your taxable assets. If you have four heirs and gift them all each year for ten years, you will reduce your tax base by 44 million yen. (1.1M * 4 persons * 10 years).
3) Create a company and pay salaries to heirs. Real work has to be done and recorded to justify the salaries. If you are a business owner, majority of your estate would likely come from the valuation of your own company. This method can be used is to reduce the valuation of the shares.
4) Create companies under names of heirs and pay fees to them. Again, real work has to be provided and recorded.
5) Borrow money to buy properties. Valuation of properties for inheritance tax purposes are usually significantly lower than the market price. If you borrow money of 100 million yen to buy a condominium in Tokyo, the market price of the condominium may be still around 100 million yen but the valuation for the inheritance tax will likely be 70 million yen. You have manage to reduce your tax base by 30 million yen.
6) Pay rents and other expenses in advance which will result in a negative effect on the balance sheet of the company. Then make gift to heirs in form of shares.
7) Make a gift in form of a property for residence to your spouse. It is tax free up to 20 million yen. This is a special tax benefit designed to stimulate the economy.
8) Your parent can make gifts up to 15 million yen for your children’s education. You will need to open a special bank account for educational expense purposes and all withdrawals from the account will have to be reported.