Comprehensive Analysis Unveils Impending Large Tax Increase and 3-Year Grace Period Under New Inheritance Rule Changes, Highlighting Unavoidable Penalties

In Japan, which is said to be an aging society, inheritance will become more common in the future. The number of inheritance cases is the same as the annual number of deaths, and in 2022 there were 1,582,033 people. This number was 129,744 people, an increase of 8.9% compared to the previous year. From now on, the number of deaths, or inheritances, will exceed 1.6 million per year. Inheritance is an urgent issue that every family faces, regardless of whether there is a tax burden or not.

 

This year there are two major rule changes regarding this ever-increasing inheritance. The first is the certain containment of condominium taxation and the second is the mandatory registration of inherited real estate. Let’s take a closer look at these two revisions.

Due to the recent rise in real estate prices, there is a large discrepancy between the inheritance value and the assessed value.

First, regarding the changes to the inheritance evaluation rules for condominiums. Because the land of condominiums is highly utilized compared to detached houses, the area owned per unit is smaller. Normally, when inheriting land, land is based on street value, and buildings are based on fixed asset tax assessed value. The road price at that time is said to be approximately 80% of the published price. The assessed value of fixed assets is equivalent to 70%, so when real estate prices are rapidly increasing like they have been recently, the gap between the inherited assessed value and the market value becomes large.

In particular, the market value of high-rise condominiums such as townhouses increases as one moves up to the upper floors, further widening the gap between the market value per unit and the assessed value for tax purposes.

In order to ensure fairness in taxation, the National Tax Agency has revised the way condominiums are assessed for inheritances occurring on or after January 1, 2024. It should be noted that this revision applies not only to condominiums but also to condominiums as a whole.

With the revision, inheritance tax of 120,000 yen will increase to 5,080,000 yen, a whopping 42 times increase!

The revision is outlined on the National Tax Agency’s website, based on actual examples of condominiums in Tokyo, Fukuoka, and Hiroshima.

The actual value (market value) of a 43-story tower condominium in Tokyo, with a 67.17 m2 unit on the 23rd floor, is 119 million yen. However, when the inheritance tax assessed value is calculated using the conventional method, the value is 37.2 million yen. The actual value is 3.2 times higher than the assessed value.

Assuming one child as the heir, the taxable value would be 1.2 million yen after subtracting the basic deduction (30 million yen + 6 million yen x number of legal heirs) of 36 million yen. If the condominium is the only inheritance, the tax would be only 120,000 yen (tax rate 10%).

According to the same page, the average discrepancy rate for condominiums is 2.34 times. In other words, for a condominium with a market value of 100 million yen, the assessed value would be 42.73 million yen (100 million yen ÷ 2.34). It is clear that condominiums, not limited to townhouses, have served as a tax-saving product, so to speak, with a much lower tax burden than cash holdings.

The planned revision of the law will require that the deviation from the actual value be assessed at “inheritance tax assessed value x deviation x 0.6” if the deviation from the actual value is 1.67 times or more. What is the rationale for multiplying the assessed value by 0.6 after first adjusting the value to the actual value for inheritance tax purposes?

There is some logic to this. This is because the average deviation rate for detached houses is 1.66 times. It’s okay if the deviation rate is below the same level as a detached house. If the price is higher than that, the price is returned to the market price and then adjusted in the same way as for a detached house.In other words, 1÷1.66=0.6, so the idea was to correct the disparity with the case for a detached house.

Using the example of a tower block in Tokyo as shown above, the discrepancy is 3.2 times the price of a detached house, so the following formula is used.

37.2 million yen x 3.2 x 0.6 = 71.42 million yen

Taxable assessed value: 71.42 million yen – 36 million yen (basic deduction) = 35.42 million yen

Inheritance tax: 35.42 million yen x 20% – 2 million yen = 5.08 million yen

This is a huge tax increase of 4.96 million yen, or 42 times the value of the property.

For those who had purchased a townhouse as an inheritance tax measure, this is truly a tax increase beyond calculation. The number of households that will be forced to redo their inheritance tax measures is expected to increase sharply.

Inheritance registration, which requires time and expense, becomes mandatory.

Another major revision to inherited real estate is that it will now be mandatory to register real estate acquired by inheritance.

Registration is legally a requirement for third-party opposition. In other words, if someone comes along who claims rights to the property, you can show that you own the property and oppose that person.

However, since registration has not been compulsory until now, the reality is that it has not always been done. If the real estate value is high in a metropolitan area, it is easy to see the benefits of being able to assert and contest your rights, but for example, if you are inheriting a mountain forest from your parents just because it is ancestral property, In the first place, there was no incentive to register properties that were unlikely to have many buyers.

Another reason why registration is not progressing is that registration and license tax is imposed upon registration. The tax rate is 0.4% of the assessed value of fixed assets. Even if the land is located in a rural area, if the area is large, the amount will increase unexpectedly. The registration process is complicated, requiring the preparation of necessary documents such as a copy of the family register, proof of registered information, and residence certificate, and is quite costly. Despite such costs, real estate that people do not feel the need to declare as their ownership has not been registered.

 

This also applies to real estate inherited before the amendment, and there are penalties for violators.

In light of these circumstances, the government has decided to make registration mandatory when inheriting real estate. In April 2021, the Real Estate Registration Act was revised, making it mandatory to register inherited land and buildings when inheritance occurs. Specifically, it is stipulated that the registration must be made within three years from the date on which the inheritance was started and ownership was acquired, and even if the inheritance division negotiations lasted for more than three years, the inheritance division has not been decided. The new law shall be registered within three years after the date of inheritance, and will apply to inheritances.

Violation of this rule is punishable by a fine of up to 100,000 yen. In addition, the procedure for changing the name and address after registration will also be obligatory, and failure to comply will result in a fine of up to 50,000 yen.

This revision will make inheritance registration mandatory even for real estate inherited before April 2024. In other words, from April 2024 onwards, inheritance registration must be completed within three years for previously inherited land and buildings.

This is not a peaceful situation, since it means that those who have not registered real estate such as family homes and forests that were once inherited from their parents will be charged with violating the law. Especially in rural areas, there are many properties that have not been registered because of the natural succession of assets between parents and children. This amendment is absolutely necessary to clarify the ownership of land, but the social burden is enormous.

There was some deregulation, but the revisions will not spare the burden of increased regulation.

However, there was some deregulation. Until now, the registration of an inheritance required the consent of all heirs to the property in question. There may be cases where the property is inherited by siblings and one of the siblings has already passed away. In such a case, the rights would have been transferred to the heirs of the deceased. Nowadays, it is often difficult to contact them. 

Therefore, the recent amendment was designed to create an environment in which it is easier to register by allowing people to voluntarily and independently register only their own share of the property.

However, this amendment from April 2024 aims to extend the scope to those who have already received inheritance and make registration compulsory, and it can be said to be a rather harsh measure, including the three-year deadline.

In particular, if you have inherited real estate that has not been properly registered from generation to generation, you will have to keep track of the family registers of past owners when registering it. The government has taken measures such as extending deadlines even if they cannot be completed within the deadline under certain conditions, but revisions that will require a nightmare-like task for some people will begin in April.

It would be a good idea to take a look through the register once for the real estate you intend to inherit or to which you are supposed to be able to inherit.

After graduating from the University of Tokyo with a degree in economics, Tomohiro Makino worked for Dai-Ichi Kangyo Bank (currently Mizuho Bank), Boston Consulting Group, and Mitsui Fudosan before joining Pacific Management in 2005. In the same year, he became President and Representative Director of Pacific Commercial Investment, and after serving as Executive Director of Nippon Commercial Investment Corporation, he established Office Makino, Inc. in 2009 and became Representative Director. Currently, he also serves as Representative Director of Oraga Research Institute, Inc. which was established in 2015, and is engaged in total production of real estate projects from planning to business implementation and operation management. His major publications include “Negative Real Estate Hell: That Inheritance is a Heavy Burden” (Bungei Shunju), “Tokyo in 2030” (Shodensha, co-authored with Masashi Kawai), and “The Future of Real Estate: Prepare for the My Home Great Transformation Era” (Asahi Shimbun Publications).