As the government is pushing for a plan to change the inheritance tax system from an estate tax to an inheritance acquisition tax, it is expected that the tax burden on heirs will significantly decrease if the system is well utilized. This is because instead of applying a high tax rate based on the total inheritance amount, a tax rate will be applied according to the amount each person inherits. Based on data from the Ministry of Economy and Finance, we specifically examined how this year's tax reform plan actually affects a family with a spouse and two children.
When the inheritance tax revision bill passes the National Assembly and is implemented, families that evenly distribute inheritance to a spouse and two adult children will be exempt from inheritance tax up to 2 billion won. Additionally, when inheriting property jointly to the spouse and children rather than solely to the children, it has been shown that the tax burden decreases even more.
◇ If inheritance is evenly distributed to a spouse and two children, the inheritance tax is exempt up to 2 billion won
If the deceased Hong Gil-dong distributes his inheritance to his spouse, Kim Bu-in, and his two children (Hong Jang-nyeo and Hong Jang-nam), the amount that can be inherited without paying taxes is up to 2 billion won.
If he bequeaths 1 billion won to his spouse and 500 million won each to his two children, under the current system, the total deduction amount would be 1.36 billion won (800 million won for the spouse deduction and a bulk deduction of 500 million won). Under the revision, it would become deductible up to 2 billion won (1 billion won for the spouse deduction and 500 million won basic deduction each).
This is due to the government increasing the benefits of spouse deductions and direct descendants deductions. The government has decided to raise the children’s deduction from the current 50 million won to 500 million won. The government noted, "The amount of children’s deductions is not large, so heirs often chose the bulk deduction method (500 million won) rather than the combination of basic deduction (200 million won) and personal deduction (50 million won per child)" as the reason for the revision.
The government also changed the spouse deduction. Currently, a minimum of 500 million won is deducted regardless of whether the spouse inherits. The revision stipulates that if the assets inherited by the spouse are less than 1 billion won, the entire amount will be deducted, regardless of the legal inheritance portion. However, the maximum limit for the spouse deduction will remain at 3 billion won or the smaller amount between that and the legal inheritance portion.
◇ If inheritance of 3 billion won is evenly distributed to a spouse and children, the tax decreases from 440 million won to 180 million won
The government cited the increase in deduction amounts and partitioning of the tax base as features of this revision. In the past, if the total amount of inherited assets was the basis for taxation, higher rates were imposed, but if the tax rates are applied according to the amounts received by each individual, the tax burden will significantly decrease.
For example, if the deceased Hong bequeaths 3 billion won of inherited assets equally to his spouse and two children, giving each 1 billion won, the inheritance tax would decrease by 59%, from the existing 440 million won to 180 million won.
Specifically, under the current law, Hong's family can deduct 1 billion won for the spouse deduction, 500 million won for the bulk deduction, totaling 1.5 billion won. The remaining taxable amount for inheritance is 1.5 billion won, so the tax to be paid by the three individuals is 440 million won.
If the revision is applied, Kim Bu-in would be able to deduct 1 billion won under the spouse deduction, while Hong Jang-nyeo and Hong Jang-nam would each be able to deduct 500 million won under the basic deduction. The total deduction amount available to Hong's remaining family would be 2 billion won, and Hong Jang-nyeo and Hong Jang-nam would each need to pay 90 million won in inheritance tax on the remaining 500 million won.
◇ If inheritance is given only to children, the tax benefits decrease
However, if Hong decides not to leave any inheritance to his spouse and only bequeaths 1.5 billion won each to his children, the situation changes. Under current law, even if the spouse does not inherit, they can deduct 500 million won and can also apply for a bulk deduction (500 million won). As a result, the family would need to pay 640 million won in inheritance tax on the 2 billion won.
If the revision is applied, the children who inherit 1.5 billion won must pay inheritance tax on the remaining 1 billion won after receiving the basic deduction (500 million won). At this time, Hong Jang-nyeo and Hong Jang-nam would each need to pay 240 million won in taxes, resulting in a total inheritance tax of 480 million won. This is 2.8 times the inheritance tax (180 million won) payable when the spouse and two children share 1 billion won each.
◇ Absorbing the bulk deduction and basic deduction as individual deductions allows for individual deduction benefits
The revision plan aims to enhance the effectiveness of additional personal deduction benefits for minors, disabled individuals, and the elderly. Previously, many chose the bulk deduction (500 million won) because it was larger than the combined basic deduction (200 million won) and personal deductions. To address this, the government has changed it so that individuals can directly receive the benefits of personal deductions.
Specifically, when considering the case of two minor children (14 years old and 9 years old) inheriting, under current law, both are likely to receive the bulk deduction of 500 million won. If the revision is implemented, they will receive the basic deduction of 500 million won each, along with an additional minor deduction (1 million won times the remaining years until age 19). For the 14-year-old, this would translate to an additional 50 million won, and for the 9-year-old, it would be an additional 100 million won. Consequently, the total deduction amount would increase from 500 million won to 1.15 billion won.
Jeong Jeong-hoon, head of the tax policy division at the Ministry of Economy and Finance, said, "Inheritance acquisition tax allows the effects of personal deductions to be directly received by the individuals, so we have redesigned the system considering the individual characteristics of heirs. We have raised the children’s deduction and rationalized the spouse deduction so that it can be deducted according to the amount of assets received by the spouse."