[PB Notebook] Can Filing an Inheritance Tax Return Be Beneficial Even Without Inheritance Tax?

Many people think that inheritance tax is a tax only paid by the wealthy. There is no obligation to file an inheritance tax return unless inheritance tax arises on the inherited property, and therefore, there are no disadvantages such as inheritance tax or additional tax penalties.

If the deceased had a spouse at the time of inheritance, there is no inheritance tax up to a total of 1 billion KRW, consisting of a blanket deduction of 500 million KRW and a spousal deduction of 500 million KRW. If only direct descendants exist, there is no inheritance tax up to 500 million KRW. Considering this, if the inheritance deduction amount is greater than the value of the inherited property, it is common to omit the inheritance tax filing.

Inheritance tax filing is a one-time event that occurs once or twice in a lifetime. It is convenient to request a tax agent to prepare the filing documents, but this involves unnecessary fees. If the inheritance tax amount is zero or small, the heirs must prepare the documents themselves, which is not easy and may cause them to overlook very important matters.

Let me explain with an example. Earlier this year, a father who owned land near Gyeonggi-do passed away. The heirs are the spouse, the mother, and two children. At the time of inheritance, the standard land price was 300 million KRW, which is less than the blanket deduction of 500 million KRW, so no inheritance tax return was filed, and the inheritance registration was completed in June under the mother's name. As of November, the mother wants to sell the inherited land for 1 billion KRW to cover living expenses. Will selling the land now result in a large capital gains tax? When should she sell to minimize taxes?

If the inherited property subject to capital gains tax is real estate or stocks, the capital gains tax may differ depending on how the inheritance tax was reported at the time of inheritance. Therefore, in such cases, a strategy considering overall benefits rather than immediate gains is necessary. Since the inheritance tax burden depends on the valuation of the inherited property, how the property is valued is a very important issue.

The principle for valuing inherited or gifted property is market value. Market value refers to the price freely traded among unspecified parties, and the scope of market value includes not only actual transaction prices but also appraisal, expropriation, public auction, or auction prices.

Even if the inherited property is appraised, if the inheritance tax is zero or low, it may be beneficial to bear the appraisal fee and have the property appraised by an appraisal firm (one firm for real estate with a standard price of 1 billion KRW or less, and two firms for real estate exceeding 1 billion KRW). If the inheritance tax is reported based on an appraisal value higher than the standard price, the reported appraisal value can be recognized as the acquisition cost when the asset is later sold.

If land with a standard market value of 300 million KRW is appraised at 700 million KRW, when the land is later sold for 1 billion KRW, the capital gains tax on a gain of 300 million KRW when inheritance tax was filed is 93.65 million KRW, whereas if inheritance tax was not filed, the capital gains tax on a gain of 700 million KRW is 257.55 million KRW, resulting in a capital gains tax difference of 164 million KRW.

In other words, if the future capital gains tax burden is expected to be greater than the inheritance tax payable when reporting at market value, it is advantageous for the heir to have an appraisal and file the inheritance tax accordingly.

The deadline for filing inheritance tax is within six months from the last day of the month in which the inheritance commencement date falls. If the filing is not made within the deadline, late filing is allowed under the Framework Act on National Taxes.

Previously, late filing was only allowed if inheritance tax was payable, but since January 1, 2007, late filing is permitted even if no inheritance tax is payable.

If inheritance tax on real estate was not filed, it is important to remember that if the market value can be confirmed now, inheritance tax can be filed late at market value, and then the property can be sold to reduce capital gains tax.

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Choi Hyesook, PB, Hana Bank Seo Apgujeong Gold Club

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