Changes to the rules on inter vivos gift and inheritance tax (Part 1): The revision of "the calendar year taxation system" for gift tax

Weekly magazines often feature articles about changes to inheritance and gift taxation rules, urging readers to take action before new regulations take effect.

Starting on January 1, 2024, the Tax Reform Act will impose significant limitations on "the calendar year taxation system" for gift tax, a commonly used measure to lower inheritance tax.

On the other hand, regarding "the taxation system for settlement at the time of inheritance," which has not been used as an inheritance tax mitigation measure, a new tax exemption at the time of inheritance of 1,100,000 yen per year will be established when calculating the inheritance taxable value for each heir.

I would like to provide details in the next blog, but this means that the latter could work as a way to mitigate inheritance tax.

Suppose you plan on gifting properties to your family members smartly and smoothly after January 2024.

In that case, weighing the pros and cons of both "the calendar year taxation system" and "the taxation system for settlement at the time of inheritance" is crucial.
（Once you select the latter system, it's important to note that it's permanent. You cannot switch back to the former.）

After that, you can evaluate your family's circumstances and determine which tax system is more beneficial for you.

In the upcoming blog posts, I would like to introduce you to the revisions to these systems, which will apply to gifts starting January 1, 2024.

Today, I will focus on "the calendar year taxation system."

Two critical changes

There are two critical amendments in "the calendar year taxation system," which are:

Extension of period for adding back gifted property before inheritance

For individuals who have received property through inheritance and were gifted by the deceased person during their lifetime under this system, the period for adding back the value of the gifted properties to the taxable value of the inheritance tax will be extended.

It will be extended from "within three years" to "within seven years before the start of inheritance."

A new deduction for the extension period

Out of the gifted properties received during the extended four years, up to 1 million yen of their value will be deducted when adding them to the value of the properties acquired by inheritance in calculating inheritance tax.

How will this revision be implemented regarding the extension of adding back periods?

Starting from January 1, 2024, the period for adding a gifted property to inheritance will not suddenly be extended from "within three years before the start of inheritance" to "within seven years before the start of inheritance."

The law stipulates that gifts for the extended period cannot be retroactive over January 1, 2024.

Therefore, the additional period for inheritance, until January 1, 2027, will remain the same "within three years before the start of inheritance（※）" in the end.

※ Within three years before the start of inheritance means the corresponding date of 3 years before the start date. For instance, if the inheritance start date is June 1, 2024, it will be June 1, 2021.

The length of the addition period varies depending on when gifts occur.

After January 1, 2027, the adding back period will gradually get longer.

Then, after January 1, 2031, it will be entirely within seven years before the start of inheritance.

The table below displays how the inter vivos gift will affect the inherited property, depending on when the inheritance occurs.

Let's examine the table above regarding the timing of inter vivos gift.

As for the gift after January 1, 2024, if the inheritance occurs in 2027, 2029, or even 2030, you need to add back its value.

For the first time after January 2, 2031, you may not need to.

The likelihood of inheritance tax filing will go up due to this change

This four-year extension will likely result in a rise in inheritance tax filings.

Now, when inter vivos gifts were added only within the three years before inheritance, the sum of the inherited assets after the addition can be under the "basic exemption amount for inheritance."

As a result, no inheritance tax is applicable.

However, with the extension, there is expected to be an increase in cases surpassing the basic deduction.

"Exemption up to 1 million yen in total" for the extended four years

With the revision, the donee has to include the value of gift properties in the inherited property, which has been extended from 7 to 3 years before the start of the inheritance.

However, the additional amount added to the inherited property during this extended period will be less than the total amount.

The balance will be the amount left after deducting 1,000,000 yen from the total value of property acquired by gift within the 4-year extension.

It is said that the government took this measure due to the difficulty the taxpayers and tax officials face in confirming all records of small gifts.

Please note that this deduction does not affect the gift tax calculation for the calendar year taxation itself.

See the image below to compare the adding back to the inherited property before and after the revision.

At the end

Thank you for taking the time to read thgough.

The current "calendar year taxation system," taxpayers often use the calendar year to mitigate inheritance tax, will become less effective due to recent revisions.

According to the Ministry of Internal Affairs and Communications, Japan faces a rapidly aging society, with nearly 20 million individuals aged 75 and over as of Respect for the Aged Day in 2022.

Also, according to the Ministry of Health, Labor, and Welfare, " the average life expectancy for 60-year-old men and women is 24.21 and 29.46 years, respectively "2020 Abridged Life Table."

To ensure that your assets are passed down wisely to your loved ones, it's crucial to stay informed about changes in rules for inter vivos gifts and inheritance tax and to prepare early while also keeping enough money to enjoy your life.

The following blog will explore revision to "the taxation system for settlement at the time of inheritance."