みなと国際会計事務所 Accounting Intelligence blog by a CPA in Tokyo

みなと国際会計事務所 Accounting Intelligence blog by a CPA in Tokyo, tax tips, accounting, running business

10 steps to reduce inheritance (estate) tax for business owners

time 2017/11/15

There are many options you can take to reduce your inheritance tax. Here are basic steps to reduce the tax. Inheritance tax offers many tax deductions or discount under certain situations. But as a basic, the fundamental aspects should be addressed first.

Basics

1) Estimate your inheritance and see how the tax will be reduced if certain conditions are met. You need to know first what are there and how much they are for each items. Without knowing that, you will never know what options are available to reduce your tax. For example, if you take over parent’s (or parent in law) house and will live there with your resident address moved, you will get 80% discount on the valuation of its land.

2) Those tax benefits are only available if its split of the estate is agreed by the deadline of the tax filing (10 months). It is recommended to prepare an agreement in advance among heirs. For example, it is necessary to have an agreement of the split and actually live there by the deadline of the filing to take the above mentioned 80% discount on the land valuation.

Possible options to reduce tax

The below are real world feasible steps to reduce the tax. Some of them require to set up a co:

1) Buy life insurance by parents money. The money received from insurance is still to be counted as taxable base, 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 gift to heirs every year. 1.1 million yen per year is tax free of gift tax by each person. This will reduce your taxable assets steadily. If you have 4 heirs and have 10 years before die, you will save 44 million yen in tax base (1.1M * 4 persons * 10 years).

3) Create a company and pay salaries to heirs. Real work has to be done to justify the salaries and keep its records of work. If you are a business owner, majority of your estate should likely come from the valuation of your own company. This 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.

5) Borrow money to buy properties. Valuation of properties are usually much lower than its real 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 already manage to have reduced the tax base by 30 million yen.

6) Pay rents in advance or pay for other expenses to harm the balance sheet of the company. Then make gift to heirs in form of shares.

7) Make gift in form of properties to spouse for residence. It is tax free up to 20 million yen. It is a special tax benefit designed to stimulate the economy.

8) Same concept as the above. Your parent can make gift for your children’s education by 15 million yen. You need to open a special bank account for this education purpose and all the withdrawal from the account will have to be reported.

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