With the government cutting corporate tax, it needs even more revenue to make up for its already alarming fiscal shortfall. So far the media has fixated on consumption tax, which tends to be more punishingly felt by the average person than any other sort of tax.
Starting next January, the government will boost the inheritance tax (sōzoku-zei), which in the past usually affected only the wealthy since there were enough deductions and exemptions to make the levy of little concern to the middle class, even those who owned property in central Tokyo.
It is the middle class, however, who are now worried. The new inheritance tax rules will lower the asset threshhold that determines whether or not they owe tax and how much the amount will be. According to various media reports, the revisions are designed to collect more money from people who have homes in major cities. With the huge boomer cohort now entering their twilight years, it’s assumed there will be a windfall in inheritance tax revenues.
But not all boomers are wealthy by conventional standards. For the most part, whatever wealth they have is tied up in the land on which they built their homes, which they did at a time when the land was relatively affordable. In the intervening years the price of property, if it’s in the city, has gone up considerably. In many cases, when someone dies with property in central Tokyo or Osaka, unless their heirs are incredibly rich (and sometimes even if they are), they have to sell the land in order to pay the inheritance tax on it.
The calculation for this tax, however, could end up being less than burdensome depending on the number of heirs and how much in other assets the deceased is leaving behind.
At present, the basic inheritance tax exemption is ¥50 million plus ¥10 million for each heir. In addition, a 50 percent deduction for the assessed value of the legator’s land can also be applied. After Jan. 1, the basic exemption will be reduced to ¥30 million plus ¥6 million for each heir, and there is no reduction on the value of land owned by the legator. However, the tax brackets have been extended in both directions.
Right now, net assets over ¥300 million are taxed at the maximum rate of 50 percent. After the revision kicks in, the most expensive bracket will double to ¥600 million and be taxed at a 55 percent rate. The bottom bracket currently covers net assets of up to ¥10 million, which are taxed at a 10 percent rate. The upper limit of the lowest bracket will be raised to ¥30 million and taxed at a 15 percent rate.
For people who are land rich but cash poor, the government has implemented a number of exemptions and deductions that will reduce the inheritance tax burden. As mentioned in this column last spring, two-generation homes (nisetai jūtaku) and the land they sit on will not be taxed if an heir already lives in the house when the parent dies. Consequently, many older people are now replacing existing homes with two-family models that will save their children money after they die.
The assessed value of land under such a home for inheritance tax purposes is lowered by 80 percent when the legator dies. Some financial planners, however, are warning heirs that two-family homes are much more difficult to sell than one-family homes, and so they should carefully consider their own situations and those of their heirs.
In the event that the house and land has to be liquidated to pay a tax, a two-generation building will make a sale that much more difficult. And even if it is sold, the sellers will be subject to a capital gains tax. In that regard, families have to compare the cost of building a new house and the attendant loan with whatever future tax bill they can expect. It may actually be cheaper to pay the tax.
Right now housing companies are trying to take advantage of the tax revision to sell more two-generation homes in major cities. They are also pushing rental apartment buildings for people who own land that at present does not contain any structures or superannuated buildings that need to be torn down. Having rental property on land greatly reduces the inheritance tax.
A recent feature in the Asahi Shimbun described an Osaka seminar organized by house builder Asahi Kasei Homes in which the merits of building rental apartments for tax purposes were explained. About 40 property owners showed up. After the lecture, they were taken by bus to a newly constructed apartment building to see the kind of product they could get and query the owner. One 69-year-old woman told the reporter, “We have to study this matter while we still have our wits about us, otherwise we could leave our children with a huge tax problem.”
That sort of thinking is exactly what these housing companies want to encourage, but as with the two-family house, sometimes the solution is more expensive and troublesome than the original problem.
With the number of potential renters dropping every year and the number of vacant rental units increasing, it is becoming more difficult to secure tenants, which means maintaining a rental apartment building could end up costing more than the potential tax on the land, not to mention the cost of building the apartments in the first place.
It thus pays for older people to carefully calculate beforehand how much inheritance tax their heirs will be liable for when they die and compare that to the cost of various schemes that have been designed to help people avoid the tax. The National Tax Agency now collects money from the heirs of only 4 percent of people who die, and it estimates that after the revision goes into effect that portion will rise to only 6 percent. The vast majority of heirs will not be liable for anything, and those who will probably won’t be taxed as heavily as they think they will.
Since the gift tax will also go up from 50 to 55 percent, it doesn’t necessarily pay for parents to transfer assets to their children before they die. But right now, if a child is buying a home a parent can give him or her up to ¥5 million in cash, tax free, if the money is used toward the purchase of a home. That amount will increase to ¥7 million starting next year. It isn’t much, but it’s something.
Philip Brasor and Masako Tsubuku blog about Japanese housing at catforehead.wordpress.com.