[How to Reform Inheritance Tax] ① Unfair Burden Increases with More Siblings Must Be Improved

Government Considers Switching Inheritance Taxation Method from Estate Tax
Ministry of Economy and Finance: "Reviewing Fair Taxation, Unrelated to Easing Inheritance Tax"
Tax Burden May Increase When Inheriting Under 1 Billion Won
Experts: "Increase Individual Deductions and Convert Spouse Exemption"

Discussions on reforming inheritance tax are more active than ever. This is because, with rising inflation and housing prices, it has become difficult to view inheritance tax as a tax borne only by ‘ultra-high-net-worth individuals.’ In particular, since President Yoon Seok-yeol pointed to excessive tax burdens as one of the causes of Korea Discount, the reform discussions have gained momentum. Voices from the business community, claiming that excessive inheritance tax burdens have made it difficult for companies to sustain healthily across generations, are also gaining strength.

However, the discussions are proceeding somewhat mixed. Especially with the addition of the Ministry of Economy and Finance’s long-standing intention to push for a transition to inheritance acquisition tax, the reform is being perceived as ‘inheritance tax reform = tax burden reduction = transition to inheritance acquisition tax.’ But tax law experts and Ministry of Economy and Finance officials unanimously say, “The inheritance acquisition tax reform is unrelated to reducing the tax burden.” Even if reformed into inheritance acquisition tax, depending on the design of the deduction system, the tax burden may actually increase in some brackets. Therefore, if the government switches to inheritance acquisition tax, it is suggested that a comprehensive reform of the deduction system should be carried out to increase individual deduction amounts and adjust tax rates in order to effectively alleviate the tax burden.

Discussion on Transition from Estate Tax to Inheritance Acquisition Tax: “Tax Burden May Not Decrease”

According to the Ministry of Economy and Finance on the 13th, the government is considering switching the inheritance tax system from estate tax to inheritance acquisition tax. The current estate tax is levied based on the total assets of the decedent (the person passing on the assets), whereas inheritance acquisition tax is levied based on the assets each heir (the person receiving the assets) acquires individually. Estate tax has the advantage of administrative convenience because it does not require verifying each heir’s share of the inherited assets. On the other hand, inheritance acquisition tax is considered to align with fair taxation because tax is paid only on the actual amount each heir receives. Among the 18 OECD countries that operate inheritance tax, about 80% (14 countries) have adopted inheritance acquisition tax.

The government’s move to initiate the transition to inheritance acquisition tax stems from the awareness of the need to resolve the issue of ‘taxation unfairness.’ Under the current estate tax system, even if the same amount is inherited, the more siblings there are, the more tax must be paid, which is considered unfair. For example, if Mr. A, who has no siblings, inherits all of his father’s assets worth 4 billion KRW, and Mr. B, who has two older brothers, inherits his share of 4 billion KRW out of his father’s 12 billion KRW assets, Mr. B must pay much more tax. This is because estate tax is levied based on the total inheritance of the decedent (father), not on the amount each heir receives. This has caused unfairness where the tax amount paid to the state varies depending on the number of siblings, even though the inherited asset amount is the same.

A Ministry of Economy and Finance official said, “Inheritance acquisition tax was also considered during the Moon Jae-in administration from the perspective of fair taxation,” adding, “Whether the tax burden decreases or not due to the transition is a separate issue.” The official emphasized, “Recently, inheritance acquisition tax has been discussed along with issues such as business succession deductions and surcharge taxation, leading to the misconception that it is being pursued to reduce inheritance tax, but this is unrelated.” Of course, it is difficult to rule out the possibility of some tax revenue reduction depending on the reform results, but the transition to inheritance acquisition tax itself is unlikely to be a means to reduce the tax burden.

Tax Burden May Increase When Inheriting Less Than 1 Billion KRW

Experts also agree that switching to inheritance acquisition tax does not necessarily lead to a reduction in inheritance burden. On the contrary, some taxpayers may face a greater burden if the system switches to inheritance acquisition tax. For example, under the current estate tax, no tax burden effectively arises on inherited amounts not exceeding 1 billion KRW due to the application of a blanket deduction (500 million KRW) and spouse deduction (500 million KRW). However, if switched to inheritance acquisition tax, the inheritance tax burden may increase. Unlike estate tax, inheritance acquisition tax calculates the tax burden individually based on each heir’s different inherited amount, so the blanket deduction system applied under estate tax is likely to be abolished.

According to an analysis by Professor Shim Chung-jin of Konkuk University’s Department of Business Administration, in cases such as ▲inheriting assets under 1 billion KRW to a spouse and two children ▲inheriting assets under 5 billion KRW to a spouse and one child, the inheritance burden is higher under inheritance acquisition tax than under estate tax. The National Assembly Budget Office also analyzed in December last year’s ‘Comparative Study on Deduction Systems by Inheritance Taxation Method’ that “when there is only one inheriting child, the amount of tax reduction by the blanket deduction under the estate tax system is actually larger.” The Budget Office assumed cases where the blanket deduction (up to 500 million KRW) would not be applied under inheritance acquisition tax because there is no incentive to apply it.

Increase Individual Deduction Levels and Convert Spouse Deduction to Tax Exemption

Experts diagnose that a large-scale overhaul of the deduction system must be carried out in parallel to reduce the tax burden on the middle class. To this end, there is an opinion that when switching to inheritance acquisition tax, the deduction level applicable to each heir should be significantly increased. Professor Shim said, “Considering the social consensus that the standard for high-priced housing is 1.2 billion KRW, in cases where there are two inheriting children, a plan to apply a deduction of 600 million KRW each can be considered,” adding, “It is necessary to adjust the deduction level so that children can maintain sufficient consumption activities.” Under the current estate tax system, the larger amount between the basic deduction of 200 million KRW plus 50 million KRW per child (personal deduction) or the blanket deduction of 500 million KRW can be deducted.

Regarding spouse inheritance, there is also an opinion that the deduction level should be raised or converted to tax exemption to reduce the tax burden. This is because, in most households, spouses do not separately spend on living and education expenses, and there is joint contribution in the process of asset formation, making it difficult to approach the property as ‘inheritance.’ In fact, major countries such as the United States, the United Kingdom, Denmark, Japan, and France exempt spouses from taxation. Professor Park Hoon of Seoul National University of Science and Technology’s Department of Taxation said, “I believe taxation is unnecessary for inheritance between spouses.”

Fundamentally, there are also opinions that the tax brackets should be adjusted or excessively high inheritance tax rates should be revised. Currently, the inheritance tax rates have five brackets: ▲10% for up to 100 million KRW ▲20% for over 100 million KRW to 500 million KRW ▲30% for over 500 million KRW to 1 billion KRW ▲40% for over 1 billion KRW to 3 billion KRW ▲50% for over 3 billion KRW. Professor Park pointed out, “The tax rates and brackets have not been revised for 24 years,” adding, “They have failed to reflect the rise in real estate prices and inflation over more than 20 years.” He added, “Paying up to 50% in inheritance tax is a heavy burden even internationally,” and “I support the transition to inheritance acquisition tax, but more importantly, the tax brackets and rates should be adjusted to reduce the tax burden.”

This content was produced with the assistance of AI translation services.