🚨 Pay Tax Based on What You Inherit, Not the Total... 'Inheritance Acquisition Tax' Gains Momentum
Today Korean Economic News | 2025.02.10
📌 Pay Tax Based on What You Inherit, Not the Total... 'Inheritance Acquisition Tax' Gains Momentum
💬 The inheritance tax reform bill, which will be a major transformation in 74 years, is expected to be submitted to the National Assembly in the first half of this year. The core content is switching from the current estate tax method to the inheritance acquisition tax method, with both ruling and opposition parties showing positive attitudes. This comes with concerns about reducing the tax burden on the middle class while also raising controversies about tax cuts for the wealthy and concerns about reduced tax revenue.
1️⃣ Easy to Understand
Today we have news about how inheritance tax will change. It's said to change from 'estate tax' to 'inheritance acquisition tax,' so I'll explain what this means and how it will affect our lives.
Currently, Korea's inheritance tax follows the 'estate tax' method. Simply put, it's a method of calculating tax based on the total property of the deceased person (decedent). For example, if your parents left 3 billion won in assets, tax is calculated by applying the tax rate (10-50%) to 2.5 billion won after excluding the basic deduction of 500 million won. And this calculated tax is divided and paid by the heirs.
On the other hand, the new 'inheritance acquisition tax' method is a way to pay tax only on the property that the heir actually receives. Using the same example, if three children each receive 1 billion won from their parents' 3 billion won estate, each child would calculate tax only on the 1 billion won they received. Each person can apply for a basic deduction, and there's a high possibility that a relatively lower tax rate will be applied.
How will this change affect our lives? First, middle-class families may see a significant reduction in inheritance tax burden. Especially when distributing assets to multiple children, the basic deduction is applied to each child, reducing the overall tax burden. For example, currently when dividing 2 billion won of assets between two children, tax must be paid on 1.5 billion won after excluding the basic deduction of 500 million won, but under the new system, if each child receives 1 billion won, they can each apply for the basic deduction, potentially greatly reducing the tax burden.
This system also affects business succession. Currently, when inheriting a large-scale business, huge inheritance taxes are often imposed, making business succession difficult. However, in the inheritance acquisition tax method, since taxes are calculated by heir, the tax burden of the child succeeding the business can be different. This can have a positive impact on business sustainability and job preservation.
However, there are concerns that this change might be a 'tax cut for the rich' that benefits wealthy people more, along with possibilities of fiscal deterioration due to decreased tax revenue. To compensate for this, the government is reportedly considering additional measures such as reducing inheritance deductions and adjusting tax rates.
2️⃣ Economic Terms
📕 Inheritance Tax
Inheritance tax is a tax imposed when property of the deceased (decedent) is transferred to heirs.
- Korea has adopted and operated the estate tax method since the enactment of the Inheritance Tax Act in 1950.
- The current inheritance tax has a basic deduction of 500 million won and spouse deduction, with a progressive tax rate structure of 10-50%.
📕 Estate Tax
Estate tax is a method of imposing tax on the entire property of the decedent.
- Tax rate is applied after subtracting deductions from the total sum of all property of the decedent.
- 21 countries including the United States and United Kingdom adopt this method, and the same tax is calculated regardless of the number or relationship of heirs.
📕 Inheritance Acquisition Tax
Inheritance acquisition tax is a method of imposing tax individually on the property actually received by the heir.
- It is characterized by applying tax rates individually according to the property acquired by each heir.
- 18 countries including Germany and Japan have adopted this, and the total tax amount may differ as deductions and tax rates are applied by heir.
📕 Tax Reform
Tax reform refers to policies that change the structure and content of the tax system.
- The types, rates, and taxation methods of taxes can be adjusted according to economic conditions, social necessities, and political agreements.
- Tax reform is an important economic policy that affects behavioral changes of economic agents, resource allocation, and income distribution.
3️⃣ Principles and Economic Outlook
💡 Background and Main Contents of Inheritance Acquisition Tax Introduction
Korea's inheritance tax system has maintained the estate tax method since its enactment in 1950, but the need for reform considering economic environmental changes and international trends has been continuously raised.
First, the current estate tax method has a structure where tax burden increases dramatically as property size increases because it taxes the entire property of the decedent. For example, when inheriting 3 billion won in property, a maximum tax rate of 50% can be applied to 2.5 billion won excluding the basic deduction of 500 million won, resulting in a very high effective tax rate. This is among the highest inheritance tax burdens in OECD countries and has acted as a constraint on asset formation and intergenerational transfer.
Second, the transition to the inheritance acquisition tax method is a way to tax based on the property received by individual heirs. This applies deductions and tax rates according to the property acquired by each heir, so when property is distributed to multiple people, there is an effect of reducing the overall tax burden. It is expected to contribute particularly to reducing tax burdens for small and medium business succession and middle-class home inheritance.
Third, inheritance tax rates and deduction systems are also likely to be adjusted. The government is reportedly considering adjusting basic deduction amounts and redesigning tax rate brackets along with the transition to inheritance acquisition tax. Through this, they are seeking ways to complement the tax revenue reduction caused by the system change while providing actual tax burden relief effects to the middle class and below.
Fourth, legal and administrative preparations are also needed for the transition of taxation methods. In the inheritance acquisition tax method, it is necessary to accurately identify and tax the inheritance property for each heir, requiring adjustments to inheritance property valuation methods, reporting systems, and tax administration systems. For this, the government is considering a phased transition with a sufficient preparation period.
The transition to inheritance acquisition tax is an important institutional transformation that goes beyond a simple change in taxation method, accompanying changes in social perception and economic impact on property transfer and asset formation. This is expected to have a significant influence on asset transfer and intergenerational distribution of wealth in the future Korean economy, along with the symbolism of being a major transformation in 74 years.
💡 Economic Impact and Outlook of Tax Changes
The introduction of inheritance acquisition tax is expected to have various impacts on individuals, businesses, and national finances.
First, the burden of property transfer for the middle class and small business owners is expected to be alleviated. Current inheritance tax has been a significant burden even on the practical middle class due to increased real estate prices and small business asset values. With the transition to inheritance acquisition tax and taxation by heir, there is a high possibility that the tax burden will decrease even for the same property size. For example, when inheriting 2 billion won in assets to two children at 1 billion won each, the total tax amount can be reduced in the inheritance acquisition tax method compared to the current estate tax method.
Second, it can have a positive impact on business succession and corporate continuity. Currently, Korean small and medium-sized enterprises are experiencing difficulties in the process of business succession from the first generation to the second generation due to high inheritance tax burdens. In the inheritance acquisition tax method, there is a possibility that the tax burden on the heir succeeding the business will be adjusted, which can contribute to business sustainability and job preservation. However, appropriate business succession requirements and post-management measures are needed to prevent issues of wealth concentration and fairness in this process.
Third, changes in asset transfer and management methods are expected. In the inheritance acquisition tax method, since taxes differ by heir, there may be changes in lifetime gift and inheritance planning. Asset management strategies considering property division methods, heir composition, and gift timing will become more important. This could lead to increased demand for asset management industry and related financial services.
Fourth, tax revenue changes and fiscal impact are also important considerations. The transition to inheritance acquisition tax may lead to a reduction in inheritance tax revenue in the short term. If the annual inheritance and gift tax revenue, which is about 8 trillion won as of 2024, decreases, additional tax adjustments may be needed to complement this. The government is expected to make efforts to prevent drastic tax revenue fluctuations through adjustment of tax rates and deduction systems considering tax revenue neutrality.
Fifth, social discussions related to wealth inequality will become more active. Inheritance tax is more than a simple tax and involves value judgments on intergenerational transfer of wealth and social equity. Debates are expected to continue on whether the transition to inheritance acquisition tax will intensify wealth inequality or contribute to increasing the overall economic pie through economic revitalization.
Considering these various impacts, the transition to inheritance acquisition tax is an important policy transformation that can bring widespread changes to the Korean economy's asset structure, business sustainability, and methods of intergenerational wealth transfer beyond simple tax reform. Therefore, a process of gathering opinions from various stakeholders and carefully analyzing economic impacts will be needed in the detailed design and implementation process.
💡 International Comparisons and Policy Implications
There is a need to compare and analyze global inheritance tax system trends and Korea's policy direction.
First, inheritance tax systems are operated in various forms by country. Of the 38 OECD member countries, 24 countries operate inheritance tax, of which 21 countries use the estate tax method and 3 countries use the inheritance acquisition tax method. Representative countries that have adopted the inheritance acquisition tax method include Germany and Japan, and some countries also operate a mixture of both methods. Additionally, countries like the United States and United Kingdom maintain the estate tax method but adjust actual tax burdens through high basic deductions and differentiated tax rate structures.
Second, there is a trend of alleviating inheritance tax burdens worldwide. Canada, Australia, and New Zealand have abolished inheritance tax, and Nordic countries like Sweden and Norway are also showing a tendency to alleviate or abolish inheritance tax. This can be interpreted as a policy choice to prevent capital outflow and encourage business activities in a global economic environment where capital mobility has increased.
Third, Korea's high effective tax rate stands out in international comparisons. Korea's highest inheritance tax rate is 50%, the second highest among OECD countries after Japan (55%). Moreover, due to low basic deduction amounts and a structure where progressive tax rate brackets rise rapidly, the effective tax rate appears high. This has been acting as a considerable burden even on the middle class due to increased asset values, and opinions have been raised that adjustments considering international trends are needed.
Fourth, there are policy balance points to consider in the tax reform process. Inheritance tax serves social functions of wealth redistribution alongside tax revenue functions. Therefore, it is important to find a balance between the two goals of economic revitalization through tax burden reduction and prevention of wealth concentration during system reform. For this, comprehensive reviews of basic deductions, tax rate structures, and various special systems are needed, and reform plans based on social consensus should be prepared.
Fifth, complementary policies according to tax changes should also be considered together. To minimize the impact of inheritance tax system changes on asset inequality, balanced adjustments with other asset-related tax systems such as real estate holding taxes and capital gains taxes are needed. Additionally, equal opportunity policies in education, employment, and housing areas should be strengthened to secure intergenerational fairness.
Synthesizing these international comparisons and policy implications, Korea's transition to inheritance acquisition tax can be seen as an important policy change reflecting global trends and domestic economic realities. However, efforts to find balance between economic efficiency and social equity in detailed design and implementation processes should continue, and social discussions and public debate processes for this will be important.
4️⃣ In Conclusion
The transition to inheritance acquisition tax is a major transformation of the inheritance tax system in 74 years and an important policy change that will have a wide-ranging impact on the Korean economy and society. This reform aims to enhance economic vitality by alleviating inheritance tax burdens for the middle class and facilitating business succession, but concerns about intensifying wealth inequality and decreasing tax revenue are also being raised.
In the short term, the reduction of inheritance tax burden is expected to have a positive impact on asset owners. Especially middle-class families with one house, small and medium business owners, and self-employed individuals will be able to establish more flexible plans for intergenerational asset transfer. Also, from a business perspective, reduced business succession burden can have a positive impact on business sustainability and long-term investment planning.
In the mid to long term, changes in asset ownership and management behaviors are expected. Given the characteristic of inheritance acquisition tax where taxes differ by heir, lifetime gift and property division strategies will become more important. This could lead to growth in the asset management and inheritance planning related financial services industry. Additionally, reduced inheritance tax burden may contribute to preventing domestic capital outflow and activating domestic investment by Koreans living abroad.
From a policy design perspective, the challenge is to find a balance that minimizes tax revenue reduction while reducing the actual burden on the middle class. It is necessary to seek a phased transition and mitigate the shock of system change through adjustments to basic deduction amounts, redesign of tax rate brackets, and refinement of business succession special provision requirements. Additionally, strengthening the tax administration system for transparent property reporting and valuation should also be pursued in parallel.
From a social perspective, conflicts between various values and interests surrounding inheritance tax reform are expected. The process of building social consensus between criticism of 'tax cuts for the rich' and advocacy as 'necessary measures for economic revitalization' is important. In particular, complementary social policies and equal opportunity policies should be strengthened together to ensure that tax reforms do not lead to intensified asset inequality.
In conclusion, the transition to inheritance acquisition tax means a change in the asset transfer paradigm of the Korean economy and society beyond a simple change in taxation method. Wisdom to find balance between economic efficiency and social equity is needed in this process, and rational system design incorporating voices from various stakeholders should be made. For inheritance tax reform to serve as a foundation for intergenerational virtuous cycle and sustainable growth of the Korean economy, a comprehensive approach to the socioeconomic environment and institutional complementary measures surrounding it, not just changes in the tax system itself, is needed at this point.