Spouse Receiving 3 Billion KRW and Two Children to Save 160 Million KRW in Inheritance Tax

The government's move to reform inheritance tax for the first time in 75 years stems from the recognition that inheritance tax, originally intended for some ultra-wealthy individuals, has become a 'tax on the middle class.' Over decades, economic changes such as inflation and soaring housing prices have outpaced the outdated inheritance tax system, causing the middle class to start paying inheritance tax. Considering the purpose of inheritance tax?to prevent vertical wealth transfer between generations and promote equality?the government judges it unreasonable for the middle class to bear the burden of inheritance tax.

'Pay as much as you receive' inheritance tax...the more assets and heirs, the lower the tax burden

According to the National Tax Service's National Tax Statistics Yearbook, the number of people who received inherited property was 212,000 in 2000, increasing to 293,000 in 2023. Among them, the number of people who actually paid inheritance tax rose 14-fold from 1,400 in 2000 to 19,900 in 2023. In the past, only 0.7% of those who inherited paid taxes, but now 6.8% pay inheritance tax. The 6.8% figure is based on the decedent, so the actual proportion of taxpayers is estimated to be much higher. If the current system is maintained, the number of middle-class people paying inheritance tax will inevitably increase over time.

In particular, the number of 'small-scale heirs,' who are not considered wealthy, has increased. Under current law, decedents subject to the highest tax rate (50%) with a taxable base exceeding 3 billion KRW number 1,251, accounting for about 6.2% of the total. On the other hand, decedents with a taxable base of 500 million KRW or less number 11,270 (56.5%), making up the majority. This means that even after receiving the basic deduction of 1 billion KRW (spousal deduction 500 million KRW + general deduction 500 million KRW), several hundred million KRW remain taxable. Considering the real estate market, inheriting just one middle-class house in Seoul could result in a tax bomb. To solve the inheritance tax issue, there are options to raise the taxable base threshold to exclude the middle class from taxation or to lower tax rates to reduce the burden. However, the Democratic Party opposes adjusting the taxable base or lowering tax rates, making it difficult to pass through the National Assembly. The Ministry of Economy and Finance attempted to lower the top tax rate from 50% to 40% through last year's tax reform plan, but it was scrapped due to opposition from opposition parties.

Simulation of inheritance property 3 billion KRW vs 5 billion KRW...inheritance tax reduced by 160 million KRW vs 360 million KRW

This time, instead of changing the taxable base or tax rates, the main point is to introduce an inheritance acquisition tax system so that heirs can apply lower tax rates. For example, assuming a spouse and two children inherit 3 billion KRW, with the two children receiving 1.5 billion KRW each, the inheritance tax is levied on the full 3 billion KRW. After subtracting the spousal deduction (500 million KRW) and general deduction (500 million KRW), 2 billion KRW is multiplied by a 40% tax rate, and then a progressive deduction of 160 million KRW is applied, resulting in an inheritance tax of 640 million KRW. The inheritance acquisition tax is levied on the 1.5 billion KRW each child receives. After subtracting the basic deduction of 500 million KRW each, 1 billion KRW is multiplied by a 30% tax rate, and a progressive deduction of 60 million KRW is applied, resulting in a calculated tax of 240 million KRW per child. Even though the same amount is inherited, a tax saving effect of 160 million KRW occurs.

Under the same conditions, if the inherited property increases to 5 billion KRW, with the spouse inheriting 2 billion KRW and each child inheriting 1.5 billion KRW, the inheritance tax would be 840 million KRW, but the inheritance acquisition tax would only be 480 million KRW. Compared to inheriting 3 billion KRW, the tax saving rate increases, and the tax reduction effect is clear. Kim Geon-young, head of the Tax Reform Promotion Team at the Ministry of Economy and Finance, said, "Inheritance tax is a progressive tax where higher tax rates apply as the payable tax amount increases, so switching to inheritance acquisition tax is expected to lower the tax burden."

The Ministry of Economy and Finance also explained that tax fairness was considered. From the perspective of tax justice, if the size of the inherited estate is the same, the tax should also be the same. However, the current inheritance tax levies tax on the inheritance amount, so heirs have to bear a higher tax rate than the amount they actually receive. Deductions granted to each heir, such as for minors or disabled persons, are uniformly deducted from the inheritance amount. This can lead to unfairness, as heirs who are not disabled can share the benefits of disability deductions. For these reasons, major countries with inheritance tax have adopted inheritance acquisition tax instead. Among OECD countries, 20 countries including Japan, France, and Germany have adopted inheritance acquisition tax. Except for Korea, inheritance tax is applied in countries like the United States, the United Kingdom, and Denmark. Last year, the International Monetary Fund (IMF) released a report titled 'Methods of Taxing Wealth,' recommending that inheritance acquisition tax is preferable to inheritance tax in terms of equitable outcomes.

Tax cut battles focused only on presidential election votes...will the government’s plan pass the National Assembly?

Members of the Democratic Party of Korea are listening to Floor Leader Park Chan-dae's remarks at an emergency party meeting held at the National Assembly on the 10th. 2025.3.10 Photo by Kim Hyun-min

For this government plan to be implemented, it must pass the National Assembly, where the ruling party holds fewer seats than the opposition. With the possibility of an early presidential election due to the impeachment ruling against President Yoon Seok-yeol, both ruling and opposition parties are proposing tax cut plans including inheritance tax reform, which may give momentum to the government's push for inheritance acquisition tax. However, many view it as uncertain whether politicians, who focus only on short-term presidential election vote gains, will tackle the fundamental reform needed to introduce inheritance acquisition tax.

The government plans to pursue fundamental inheritance tax reform, including lowering the top tax rate, as a long-term task alongside introducing inheritance acquisition tax. To normalize the outdated tax system to fit current realities, reforms are needed not only to increase deductions per heir but also to lower the taxable base and tax rates to levels seen in advanced countries. However, the adjustment of the taxable base system and lowering of the top tax rate announced in last year's tax reform plan were blocked by opposition parties framing it as a 'tax cut for the rich,' resulting in failure to amend the law. This is why the government did not touch taxable base adjustments, tax rate reductions, or limits on business inheritance deductions in this reform plan. Jeong Jeong-hoon, director of the Tax Policy Bureau at the Ministry of Economy and Finance, said, "Not including taxable base adjustments and tax rate reductions in this reform plan does not mean we are abandoning the plan. We intend to continue pursuing it through a separate public discussion process based on social consensus."

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