🚨 Major Inheritance Tax Reform After 75 Years, the Meaning and Prospects of Introducing Inheritance Acquisition Tax

Today Korean Economic News | 2025.03.09

📌 Major Change After 75 Years···What Is Inheritance Acquisition Tax?

💬 The government is expected to announce plans to abolish the 'estate tax' method of inheritance tax, which has been maintained since 1950, and reform it to an 'inheritance acquisition tax' method. Inheritance acquisition tax is a method of taxing individually on property inherited by each heir, and the inheritance tax burden is likely to decrease. This reform is interpreted as a measure to align with the tax systems of OECD countries, and the abolition of spousal inheritance tax and expansion of child inheritance deductions will also be discussed in the National Assembly.

1️⃣ Easy Understanding

The government is planning to significantly change the inheritance tax system that has been in place for 75 years since 1950. It's changing from an 'estate tax' method to an 'inheritance acquisition tax' method. I'll explain what this is, why it's important, and how it will affect our lives in simple terms.

Currently, Korea's inheritance tax operates under the 'estate tax' method. This calculates tax based on the entire estate left by the deceased. For example, if parents left an estate of 1 billion won, the tax would be calculated by applying the inheritance tax rate (10-50%) to the remaining 500 million won after deducting the basic exemption amount (500 million won). The tax calculated this way is then shared by the heirs.

On the other hand, the new 'inheritance acquisition tax' method calculates tax based on the property actually received by each heir. For example, if parents left different amounts of property to three children, the tax would be calculated individually according to the amount each child received. If A received 500 million won, B received 300 million won, and C received 200 million won, the tax would be calculated by applying the tax rate to the amount each person received.

This change is important for three main reasons. First, the overall inheritance tax burden is likely to decrease. Each heir can apply for a basic deduction, and in a progressive tax rate structure, dividing an inheritance among heirs can result in lower tax rates. Second, property distribution can become more equitable. In the current method, even if one heir receives most of the property, the tax burden is shared, but in the new method, those who receive more will pay more tax. Third, Korea's inheritance tax system becomes more similar to most OECD countries. Currently, only six OECD countries, including Korea, use the estate tax method.

This reform is an important change that can affect not only the way tax is calculated but also social perceptions of property inheritance and how assets are distributed within families. The government is also considering abolishing spousal inheritance tax and expanding child inheritance deductions, all of which will be finalized through discussions in the National Assembly. Families expecting inheritances or those making asset plans should pay attention to these changes and seek professional advice.

2️⃣ Economic Terms

📕 Inheritance Tax

Inheritance tax is a tax imposed when a deceased person's property is transferred to heirs.

• It aims to prevent concentration of wealth and achieve fair taxation on the transfer of wealth between generations.
• Korea's inheritance tax rate has a five-tier progressive structure of 10-50%, among the highest in OECD countries.

📕 Estate Tax Method

The estate tax system is a system that taxes the entire estate of the deceased.

• It calculates the taxable amount by combining all inheritance properties and then applying basic exemptions and various deductions.
• The calculated tax is shared by the heirs according to legal inheritance ratios.

📕 Inheritance Acquisition Tax

Inheritance acquisition tax is a method of taxing individually on the property actually acquired by heirs.

• Each heir calculates and pays taxes individually according to the value of the property they actually inherited.
• This method is adopted by most OECD countries, including the United States, Germany, and the United Kingdom.

📕 Generational Transfer

Generational transfer refers to the process of transferring assets from the parent generation to the child generation.

• It occurs through inheritance and gifts, and is related to issues of wealth inheritance and inequality in capitalist societies.
• Taxation during the generational transfer process varies by country and reflects socioeconomic values.

3️⃣ Principles and Economic Outlook

💡 Comparison and Differences Between Estate Tax and Inheritance Acquisition Tax Methods

• The current estate tax method and the upcoming inheritance acquisition tax method show important differences in tax principles and results.

  • First, there is a fundamental difference in the taxation objects and calculation methods. The estate tax method views the entire property of the deceased as one taxation object and calculates tax on it. It calculates the tax amount by applying progressive tax rates (10-50%) after deducting the basic exemption (500 million won) and various personal and material deductions from the total inheritance property. On the other hand, the inheritance acquisition tax method views the property acquired by each heir as a separate taxation object and applies deductions and tax rates for each heir. This is like taxing each individual's 'inheritance income' separately, similar to income tax.

  • Second, there is a big difference in the distribution of tax burden. In the estate tax method, the calculated tax is shared by the heirs according to the legal inheritance ratio or actual inheritance ratio. That is, heirs share the total tax regardless of how much property each heir received. In contrast, in the inheritance acquisition tax method, each heir bears only the tax on the property they received. This is a method where 'those who receive more pay more tax,' which can be seen as more fair in terms of distributive equity.

  • Third, there is also a difference in the size of the tax burden. Generally, the inheritance acquisition tax method tends to reduce the tax burden compared to the estate tax method. This is because when inheritance property is distributed among several heirs, each taxable base becomes lower in a progressive tax rate structure, resulting in lower applicable tax rates. For example, if one person inherits 2 billion won, a high tax rate is applied, but if four people each inherit 500 million won, a lower tax rate is applied. Additionally, each heir can apply for a basic exemption separately, which can lower the effective tax rate.

  • Fourth, they have different impacts on inheritance planning and decision-making. In the estate tax method, the total tax burden is similar regardless of how the inheritance property is distributed, so it wasn't a major consideration from a tax perspective. However, in the inheritance acquisition tax method, the total tax burden can vary depending on how the inheritance property is distributed. This has the effect of inducing fair distribution among heirs and makes tax aspects more of a consideration in inheritance planning.

• Considering these differences, the transition to the inheritance acquisition tax method reflects a change in philosophical approach and social values regarding inheritance, beyond a simple change in taxation technique. While the estate tax method focuses on 'social recovery of wealth inheritance,' the inheritance acquisition tax method focuses more on 'taxation on individual property acquisition.' This shows that the issue of which method a country's inheritance tax system adopts reflects not just a simple tax collection method, but social consensus on wealth inheritance and redistribution.

💡 Economic and Social Impacts of Inheritance Tax Reform

• The transition to the inheritance acquisition tax method is expected to have various economic and social impacts.

  • First, it can have a positive impact on business succession and management stability. In the current estate tax method, the inheritance tax burden is very high when transferring management rights of major shareholders, often requiring loans using stocks as collateral or selling stocks to maintain management rights. This has had a negative impact on stable business management and long-term growth. The transition to the inheritance acquisition tax method could reduce the inheritance tax burden, enabling stable business succession and long-term investment planning. Especially when combined with the family business inheritance deduction system, it can help with generational change and sustainable growth of small and medium-sized enterprises.

  • Second, it can affect asset markets and the real estate market. Reduced inheritance tax burdens can lead to more active generational transfer of assets, which can affect asset markets such as real estate or stocks. Particularly for real estate held by the elderly who are about to inherit, reduced inheritance tax burdens can decrease sales pressure. This might lead to a decrease in real estate supply in the short term, but in the long term, various market effects can appear depending on how the inheriting child generation utilizes the assets.

  • Third, there are impacts on tax revenue and fiscal operations. Generally, the inheritance acquisition tax method tends to reduce the tax burden compared to the estate tax method, potentially decreasing inheritance tax revenue. As of 2024, Korea's inheritance tax revenue is about 3 trillion won, less than 1% of the total national tax revenue (about 370 trillion won), but the revenue decrease can still affect fiscal operations. However, some argue that the revenue decrease could be limited in the long term due to expanded tax base and reduced tax avoidance.

  • Fourth, there are impacts on wealth inequality and intergenerational equity. Inheritance tax, as a tax on intergenerational wealth transfer, contributes to reducing inequality and promoting equality of opportunity. If the transition to the inheritance acquisition tax method reduces the inheritance tax burden, there may be concerns about wealth inheritance and deepening inequality. On the other hand, some argue that if reduced inheritance tax burdens lead to increased asset utilization and consumption of the elderly, resulting in more active intergenerational asset transfer, it could help resolve intergenerational imbalance.

  • Fifth, it can bring changes to family asset distribution and inheritance culture. In the inheritance acquisition tax method, it is advantageous from a tax perspective to distribute inheritance property among multiple heirs, potentially changing inheritance patterns that were concentrated on one child. This can promote more equal asset distribution within families, moving away from traditional inheritance practices centered on the eldest son. Additionally, with more active lifetime gifts and inheritance planning, open discussions and planning for asset succession within families may increase.

• Considering these various impacts, the transition to the inheritance acquisition tax method is an important change that can bring wide-ranging economic and social ripple effects beyond a simple tax reform. Careful review of detailed system design and complementary measures will be necessary to maximize the intended positive effects and minimize negative effects of this reform.

💡 International Comparison of Inheritance Tax Systems and Korea's Position

• The transition to the inheritance acquisition tax method brings Korea's inheritance tax system more in line with international trends, making it worthwhile to compare with major countries' cases.

  • First, most OECD countries have adopted the inheritance acquisition tax method. Among the 37 OECD member countries, 24 operate inheritance tax, of which only six countries, including the United States, United Kingdom, and Korea, have adopted the estate tax method. The remaining 18 countries operate the inheritance acquisition tax method. This reform has the significance of adjusting Korea's inheritance tax system closer to the international mainstream. Among major countries, the United States uses the estate tax method but has a very high basic exemption amount of about 1.3 billion won (based on federal tax), so inheritance tax is practically imposed on only a very small number of people. The United Kingdom also uses the estate tax method but has generous basic exemptions and spousal exemptions, resulting in low effective tax rates.

  • Second, in terms of effective tax rates, Korea is at a high level among OECD countries. Based on the highest tax rate, Korea's 50% is the second highest after Japan (55%). However, with low basic exemption amounts and densely structured tax brackets, the effective tax rate is among the highest in OECD countries. Germany (highest rate 30%) and France (highest rate 45%), which have adopted the inheritance acquisition tax method, apply different tax rates depending on the relationship between the heir and the deceased, with a characteristic of applying lower rates to direct descendants. When Korea transitions to the inheritance acquisition tax method, it is likely to reference the cases of these countries.

  • Third, there are also differences in exemption systems among countries. Most countries either exempt spousal inheritance or apply high deductions. Japan deducts the larger of 160 million yen or the legal inheritance share for spousal inheritance, and Germany provides a 500,000 euro deduction for spouses. Korea also provides a spousal deduction (maximum 3 billion won), but tax can still be imposed on spousal inheritance. This reform also includes discussions about abolishing spousal inheritance tax, potentially bringing Korea closer to the international trend.

  • Fourth, support systems for business inheritance also vary by country. Germany deducts 85-100% of asset value for business inheritance, and the United States operates special evaluation and installment payment systems for family-owned farms and small businesses. Japan also supports business inheritance through non-listed stock valuation reductions and installment payments. Korea's family business inheritance deduction system has been criticized for having strict requirements and post-management burdens, reducing its effectiveness. This reform is expected to include discussions on enhancing the effectiveness of business inheritance support systems.

  • Fifth, integration with gift tax also differs by country. The United States and United Kingdom manage gift tax and inheritance tax in an integrated manner, while Germany, France, Japan, and others operate them as separate tax systems like Korea. Integration of gift tax and inheritance tax prevents inheritance tax avoidance through lifetime gifts and enables consistent taxation on intergenerational asset transfers. Changes to the gift tax system are also expected to be discussed in this reform.

• Through such international comparisons, this transition to the inheritance acquisition tax method is a meaningful change that brings Korea's inheritance tax system closer to international standards. However, the effects and impacts can vary greatly depending on how the detailed system is designed, not just changing the taxation method, including tax rate structure, exemption systems, and business inheritance support. Therefore, it is important to design a system that fits Korea's economic and social context while referencing international best practices.

4️⃣ In Conclusion

The government's transition of the inheritance tax from the estate tax method, which has been maintained for 75 years since 1950, to the inheritance acquisition tax method has significant economic and social implications beyond a simple tax reform. This is a measure to align Korea's inheritance tax system with the international standard adopted by most OECD countries, and reflects a change in the taxation philosophy regarding inheritance.

The inheritance acquisition tax method taxes individually on property actually received by each heir, and is likely to reduce the tax burden compared to the current estate tax method. Particularly when inheritance property is distributed among multiple heirs, there is an effect of reducing each heir's tax burden in a progressive tax rate structure. Additionally, it has the advantage of achieving fair taxation among heirs with a method where 'those who receive more pay more tax.'

The economic impacts of this reform are expected to be diverse. It can have a positive impact on business succession and management stability, and can also bring changes to asset markets and the real estate market. It can also affect asset distribution within families and inheritance culture, potentially promoting more equal asset distribution.

However, there are various perspectives on how these changes will affect wealth inequality and intergenerational equity. There are concerns that reduced inheritance tax burdens could lead to wealth inheritance and deepening inequality, while there are also expectations that it could increase economic vitality by making intergenerational asset transfers more active.

The specific reform plan to be announced by the government is expected to include detailed system design, particularly tax rate structure, exemption systems, and business inheritance support. Additionally, the abolition of spousal inheritance tax and expansion of child inheritance deductions will also be discussed. The actual effects and impacts of the reform will vary depending on how these details are ultimately decided.