[News Terms] The Ball Launched by the Presidential Office: 'Inheritance Tax and Capital Gains Tax'

The core of the ‘30% inheritance tax rate reform’ under review by the Presidential Office lies in the ‘inheritance acquisition tax’ and ‘capital gains tax.’

Among these, the inheritance acquisition tax is a method of taxing only the actual inherited property based on the heirs. This has the advantage of imposing a relatively lighter tax burden compared to the current inheritance tax method, which is levied on the property passed down based on the decedent.

The current inheritance tax rates apply 10% for a taxable base of up to 100 million KRW, 20% for over 100 million KRW up to 500 million KRW, 30% for over 500 million KRW up to 1 billion KRW, 40% for over 1 billion KRW up to 3 billion KRW, and 50% for amounts exceeding 3 billion KRW. Assuming two children inherit 1 billion KRW under these rates, under the inheritance tax method, a 30% tax is applied first, and then the two children divide the inheritance. However, if the inheritance acquisition tax method is applied, a 20% inheritance tax rate is applied (assuming equal inheritance of half each). Since the tax rate increases with the size of the inheritance, dividing the inheritance under the inheritance acquisition tax method can result in relatively lower taxes.

The inheritance acquisition tax also better aligns with the ‘ability-to-pay’ principle. This tax principle states that taxes should be levied fairly according to the taxpayer’s ability to pay, meaning that paying taxes on the amount each person inherits conforms to this principle.

However, adopting the inheritance acquisition tax method may reduce the tax burden as the number of heirs increases, potentially encouraging the division of inheritance. The problem is that this could lead to disguised division and other issues, which could ultimately result in criticism of ‘tax cuts for the wealthy’ by reducing the tax burden on the affluent.

Internationally, the inheritance acquisition tax method is more widely used. Among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD), 24 operate inheritance taxes. Of these, only four countries, including Korea, Denmark, the United States, and the United Kingdom, apply the inheritance tax method.

The capital gains tax under review by the Presidential Office is part of the inheritance tax reform related to business succession. The key point is that taxation is not imposed at the time of inheriting capital assets but on the gains realized from selling those assets after holding them for more than one year. Capital assets include stocks, bonds, real estate, business sales, partnership shares, patents, and more. Because taxation occurs at the profit realization stage rather than at the time of inheritance, it has the advantage of supporting smooth business succession.

The business community points out that the inheritance tax, which can reach a top rate of 60%, is an obstacle to the sustainable growth of companies. For example, following the death of Kim Jung-ju, founder of Nexon Group, his heirs, unable to bear the enormous inheritance tax, paid the tax in kind with shares of Nexon’s holding company (NXC), leading the government to become the second-largest shareholder of NXC. The management dispute at the shareholders’ meeting this year involving the heirs of the late Lim Sung-ki, founder of Hanmi Pharmaceutical Group, also stemmed from the inheritance tax burden.

Internationally, countries such as Canada and Sweden have introduced and operate capital gains taxes. The method that the domestic business community particularly focuses on is the Swedish model. Sweden abolished its inheritance tax system in 2005, which taxed at the time of inheritance, and introduced a capital gains tax system where even if a second-generation manager inherits a company, tax (30%) is imposed only when the company is sold.