The Inheritance Trap

Much has been written recently about Japan’s inheritance tax. And with good reason. With its rapidly aging society, nowhere is inheritance tax more important than in Japan. Over the past decade, an unexpected segment of Japan’s population has been impacted. Although originally aimed at the wealthy, inheritance tax now impacts regular Japanese salary men and retirees who own land and whose other assets’ value has nominally increased over the years. The inheritance tax bill often comes as a shock to the heirs. As a result, any change to Japan’s inheritance tax regime is important not only to the wealthy, but also to the average Japanese homeowner.

In an effort to redistribute wealth and stimulate the sluggish economy, the Japanese government is considering a radical change to the inheritance tax regime. The alteration could promote the transfer of trillions of yen from the nation’s conservative, money-conscious elderly to the free-spending younger generation.

Beginning in April 2011, a reduction in the inheritance tax exemption will be effectively coupled with a change in the gift tax regime. The policy change would see a significant rise in inheritance tax, as well as a reduction of gift tax by almost half. This makes it attractive to give money away now, instead of waiting and having a future inheritance taxed at higher rates. The essence of the tax reform is encouraging elderly Japanese to gift their assets now instead of waiting to bequeath it in a will. As an economic stimulus measure, the success of this plan hinges on a hope that the younger generation will open their wallets and spend more freely than their savings-conscious parents or grandparents.

Although it is hoped that the reform will provide a much needed boost to the economy, one important concern is the individuals who will be affected by the inheritance tax solely due their holdings of over-valued assets. For them, the changes may seem like a trap. Not only do such individuals have little scope to take advantage of the gift tax break, but their heirs face the possibility of losing family property if they cannot pay the higher inheritance tax upon bequest.

Will the tax reform have the hoped for stimulatory effect on the economy? In a theoretical sense, the proposed change is appealing. Japan’s younger generation have certainly demonstrated a high propensity to spend. However, given a global economic slump that is affecting Japan more than other developed countries, a bet on increased consumer spending to improve the nation’s economy is a risky bet.

In a best case scenario, the gift tax cut and inheritance tax exemption reduction will promote economic activity internally, while the proposed corporate tax cuts will lure overseas investors, and thereby stimulate the economy. However, while both tax changes are further steps in the right direction, they do not compare favorably with the current U.S. estate tax regime or the corporate tax regimes in neighbors such as Hong Kong and Singapore. To improve the stagnant economy, Japan also needs to take bold steps in key areas such as national debt reduction. Given the scope of Japan’s economic problems, it is unlikely the inheritance tax changes will promote enough spending to have a sizeable impact on the current economy.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Kerri Schantz is a summer associate at Accounting Asia where she supports the company’s activities in Japan and Singapore.