Proposed inheritance tax exemption isn’t really about inheritance taxes

February 21st, 2013 by Philip Brasor & Masako Tsubuku

Indirect beneficiary: High school in Gunma Prefecture

Indirect beneficiary: High school in Gunma Prefecture

The whole point of a consumption tax is that everyone, rich and poor alike, bears it equally according to ability, though in truth the poor bear more since a greater portion of their spending is for necessities. The government understands this even if it isn’t admitting as much. News reports are saying that the ruling coalition of the Liberal Democratic Party and the Komeito have decided to discuss whether or not certain items, such as food, will be subject to either smaller or no increases in the consumption tax by the time it is set to be raised to 10 percent in 2015, though they aren’t guaranteeing any exceptions. In any case, the initial increase to 8 percent that takes effect next year will proceed without any exceptions.

Nevertheless, the LDP thinks it has to throw taxpayers a bone of some sort, which is one of the explanations being given for the inheritance tax exemption that goes into effect in April for three years. It’s generally believed that Japan’s tax on legacies is punishingly high, though in fact only 4 percent of heirs ever pay it. If it seems high it’s probably because people who live in Tokyo, where the media is concentrated, tend to pay the lion’s share of inheritance taxes owing to much higher property values, but even in the capital only 9 percent of heirs ever pay inheritance tax.

However, families of means or those with property are worried since the government has announced that its goal is to raise the national portion of inheritance tax payers to 6 percent. In addition, the income tax burden for the highest tax bracket may be increased from 40 to 45 percent. Older people with money are said to be rushing to public lectures by investment experts to find out how they can pass on more of their assets to their children and grandchildren.

So the government came up with this exemption, which is exclusively used for education. Grandparents can give up to ¥15 million to each grandchild to pay for education-related expenses without the recipient having to pay a gift tax. In order to claim the exemption, the grandparent must deposit the money in an account that has been opened expressly for this purpose in a trust bank. The grandchild or parent/guardian can then withdraw the funds whenever they are needed for educational purposes, but in order to do so they must submit a receipt before withdrawal showing how the money is being used.

What this means, of course, is that the grandchild and/or parent must spend their own money first in order to get a receipt. Then they can withdraw the equivalent amount. Though the exemption doesn’t expressly target people of means, it seems obvious that those who are already fairly well off are best equipped financially to utlize the system; that is, if they go about it in the proper way.

Realistically speaking, in the past if grandparents wanted to help pay for their grandchildren’s education–or anything, for that matter–it was easy to get around the rules for gift taxes. How would the authorities check, especially if the gift was made in cash without any accompanying documentation? As it stands now, any one can give up to ¥1.1 million a year in gifts, tax free, to another family member. And a draft of the tax revision bill includes a cut in the gift tax of between 5 and 10 percent for gift amounts over ¥3 million.

The exemption is really just another government scheme to pry savings from the clutches of older folks, who have nothing to spend it on and thus let it languish in interest-free savings accounts or in the back of a drawer somewhere. If the authorities can convince grandparents that their legacies will be taxed at a higher rate when they die, they may feel pressure to unload that money more quickly, and the education exemption gives them an incentive to do so. Grandchildren can receive this money up to the day before they turn 30 as long as it’s being used for education (presumably, at that age, for graduate or medical school). Thereafter, a gift tax is levied.

But despite these capital distribution purposes, the government is still muddled about the details. For now, “educational expenses” are limited to tuition and school fees, and as of Feb. 8 the government was still discussing whether or not fees for cram schools or even private tutoring, such as piano lessons, should be included. Apparently, many people believe the scope of the exemption will be broadened by April. The stock prices of cram school chains have increased appreciably since the exemption was announced.

According to the Asahi Shimbun, ¥15 million was chosen as the maximum amount because that is what it costs to educate a child from kindergarten to college graduation if the child attends only private schools. For public schools it’s a little more than ¥4 million. The Asahi conjectures that only “rich” grandparents have enough money to worry about inheritance taxes, and so the exemption doesn’t have much meaning for the average family. If anything, a good number may be more worried about negative legacies, such as debts or property that is unsellable but for which the heirs would have to pay property taxes and maintenance. However, Tokyo Shimbun reports that an association of trust banks says 540,000 accounts have already been set up to take advantage of the exemption, so obviously a lot of grandparents who have money sitting around are paying attention.

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