Government Converts Inheritance Tax to Inheritance Acquisition Tax... Major Overhaul of Estate Tax After 75 Years

"Pay According to What You Receive": Complete Overhaul of Inheritance Tax
Personal Deductions Expanded... Increased to 500 Million Won per Child
Current 500 Million Won Spousal Deduction Raised to 1 Billion Won
Inheritance Tax Exemption of at Least 2 Billion Won for Two Children

The government is completely overhauling the inheritance tax system for the first time in 75 years, shifting from taxing the entire inheritance amount to a method where each heir pays tax based on the portion they receive. The child deduction will be significantly increased from 50 million won per person to 500 million won, and personal deductions will be expanded so that the more children there are, the greater the deduction amount. This aims to reduce the tax burden of inheritance tax, which has become a tax on the middle class as the outdated tax system has failed to keep up with economic changes such as inflation and rising housing prices. Amid a heated political battle over inheritance tax reform ahead of the early presidential election, there are concerns about whether the government’s plan, which requires fundamental reform, can gain momentum.

On the 12th, the government announced the 'Introduction Plan for Inheritance Acquisition Tax' containing these details. Jeong Jeong-hoon, Director of the Tax Policy Bureau at the Ministry of Economy and Finance, explained the background of introducing the inheritance acquisition tax, saying, "It was one of the few remaining tasks in the process of adopting several advanced tax systems in Korea," and "There were many calls and demands to switch to the inheritance acquisition tax to align with global standards." The government plans to announce the related bill for public comment within this month, hold a public hearing in April, and submit the bill to the National Assembly in May. If the inheritance and gift tax law amendment containing this reform passes the National Assembly, the major framework of the current inheritance tax system, introduced in 1950, will change.

The inheritance acquisition tax is a method of taxing heirs based on the actual assets they inherit, which is significantly different from the current inheritance tax system that taxes the entire inheritance amount. For example, if 1.5 billion won of inherited assets is passed down to three children, under the current inheritance tax system, a uniform deduction of 500 million won is subtracted from the 1.5 billion won, and tax is levied on the 1 billion won (tax base), amounting to 240 million won, which is then divided among the three heirs. In contrast, under the inheritance acquisition tax system, each child is taxed on the 500 million won they inherit. In this case, a basic deduction of 500 million won applies to each 500 million won, resulting in zero tax. Since inheritance tax has a progressive structure where the tax rate increases as the tax base grows, switching to the inheritance acquisition tax will have a greater effect of reducing inheritance tax amounts when there are more heirs such as children.

The deduction system will also be completely revamped to align with the introduction of the inheritance acquisition tax. First, the uniform deduction of 500 million won, which becomes meaningless with the inheritance acquisition tax, will be abolished. Instead, the current child deduction of 50 million won per person will be raised to 500 million won, and the spouse deduction will maintain the maximum deduction limit of 3 billion won within the statutory inheritance share (the inheritance distribution ratio defined by civil law), but will be adjusted so that up to 1 billion won can be deducted even if it exceeds the statutory inheritance share. This effectively raises the current spouse deduction of 500 million won to 1 billion won, meaning that inheritance tax for the spouse will be eliminated up to 1 billion won regardless of the statutory inheritance share under civil law. Assuming 2 billion won of assets are inherited with 1 billion won to the spouse and 500 million won each to two children, the spouse will receive a spouse deduction of 1 billion won, and each child will receive a basic deduction of 500 million won, resulting in no tax liability. Under the existing inheritance tax system, a total deduction of 1.36 billion won was applied, including a spouse deduction of 860 million won and a uniform child deduction of 500 million won, resulting in a tax of 130 million won.

Considering the current deduction amount of 1 billion won (uniform deduction of 500 million won + minimum spouse deduction of 500 million won), a new 'minimum personal deduction' will be established. Director Jeong explained, "Even if the total personal deduction is less than 1 billion won, the shortfall will be additionally deducted to guarantee a minimum personal deduction of 1 billion won." For example, if out of 1 billion won of inherited assets, the spouse actually inherits 300 million won and the children inherit 700 million won, the children will receive an additional deduction of 200 million won to make the total deduction 1 billion won. When switching to the inheritance acquisition tax, a minimum inheritance amount of 2 billion won can be exempted from tax, including 1 billion won for two children’s deductions and 1 billion won for the spouse deduction.

The government’s position is that switching to the inheritance acquisition tax is necessary to enhance tax fairness and comply with global standards. Among the 24 member countries of the Organisation for Economic Co-operation and Development (OECD) that operate inheritance tax, 20 countries have introduced the inheritance acquisition tax. Only four countries, including the United States, the United Kingdom, and Denmark, use the inheritance tax system like Korea. The announced reform plan (amendment to the Inheritance and Gift Tax Act) will be submitted to the National Assembly around May after a 40-day public comment period and public hearings. Even if the bill passes the National Assembly, it is expected to be implemented no earlier than 2028, as time is needed to organize the increasingly complex tax administration system and prepare supplementary legislation. A Ministry of Economy and Finance official said, "If legislation is completed within this year, we expect to build the tax enforcement system in 2026-2027 and implement it from 2028."

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