[2024 Tax Revision] Top Inheritance Tax Rate Reduced from 50% to 40%... Child Deduction Increased to 500 Million Won

The government will lower the top inheritance tax rate from the current 50% to 40% and expand the child deduction amount to 500 million won (currently 50 million won). This is a move to overhaul the outdated tax system and reduce the tax burden to a level that meets global standards.

On the 25th, the government announced the '2024 Tax Reform Plan' centered on these points. Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, said regarding the inheritance tax reform, "It is to improve economic efficiency by reorganizing the outdated tax system reflecting the changed economic conditions."

Tax Bracket Adjustment for the First Time in 24 Years... Surcharge on Major Shareholders Also Removed

The government first decided to adjust the inheritance tax rate, which is among the highest in the world. The main points of this inheritance tax reform are to lower the current top rate of 50% to 40% and expand the lowest taxable bracket, which is taxed at 10%, from 100 million won to 200 million won. The inheritance tax system has been maintained since the 1999 tax law revision, when the highest taxable bracket was lowered from 'over 5 billion won' to 'over 3 billion won' and the top rate was raised from 45% to 50%.

The government will eliminate the top taxable bracket of 'over 3 billion won' and reorganize it into four tiers: 'over 1 billion won' (40%), 'up to 1 billion won' (30%), 'up to 500 million won' (20%), and 'up to 200 million won' (10%). Currently, South Korea's inheritance tax rates apply 10-50% across five taxable brackets. The current top rate of 50% is the second highest among OECD countries after Japan (55%) and is about twice the average top rate of member countries (26%). Including the surcharge evaluation applied to major shareholders of large corporations, the effective top rate reaches 60%.

If this tax law amendment passes the National Assembly, the top rate will be reduced to 40%, and the 20% surcharge evaluation applied to major shareholders of large corporations will be abolished, significantly easing the inheritance tax burden.

The adjustment of the taxable bracket exceeding 3 billion won will benefit 2,400 people. Most owners managing companies in Korea fall into this bracket. As business owners age and their inheritance tax preparations intensify, there have been calls to efficiently improve the inheritance tax system, which has been frozen for 24 years since 2000. However, critics argue that since those subject to taxation over 3 billion won account for less than 5% of the total, this is a tax cut for the ultra-rich.

Child Deduction Limit Raised to 500 Million Won... Tax Burden on Business Succession Also Eased

The deduction amount applied when inheriting property to children will also be raised from 50 million won per person to 500 million won. For example, if the inherited property is 2.5 billion won with one spouse and three children, under this revision, 2.2 billion won will be deducted, resulting in an inheritance tax of 40 million won, which is 400 million won less than before (440 million won). Jeong Jeong-hoon, Director of the Tax Policy Bureau at the Ministry of Economy and Finance, explained, "We raised the child deduction amount for inheritance tax considering the tax burden reduction for middle-class families with multiple children and the rise in prices and asset values."

However, the increase in the lump-sum deduction and spouse deduction amounts was not included in this reform plan. The inheritance tax deduction limit has remained at 1 billion won (lump-sum deduction 500 million won + spouse deduction 500 million won) for 28 years since 1997. During this period, the economy and asset prices have grown significantly. Since the 1997 revision of the inheritance tax deduction limit, South Korea's gross domestic product (GDP) has increased more than fourfold, the price of a Seoul apartment (34 pyeong standard) has risen 5.7 times, but inheritance tax has increased 9.7 times.

The tax reduction effect from this inheritance tax revision is estimated to reach 4 trillion won over five years. Director Jeong said, "We expect a tax burden reduction effect of 1.8 trillion won from the top rate reduction and 1.7 trillion won from the increase in child deductions."

The tax burden will also be eased during business succession. The limit for the business succession deduction will be doubled from the current 60 billion won to 120 billion won for companies that have made efforts to increase value. The business succession deduction is a system that allows owners who have managed small and medium-sized enterprises with annual sales under 500 billion won for more than 10 years to deduct up to 60 billion won of inherited property when passing on the company.

The government plans to exempt the annual sales under 500 billion won condition only for companies that have undergone value-up, scale-up, or relocated from Opportunity Development Zones, thereby expanding the scope to all small and medium-sized enterprises (excluding cross-shareholding restricted companies). The deduction limit will also be doubled from 60 billion won to 120 billion won. Whether a company qualifies as a value-up excellent company will be based on whether the shareholder return ratio (dividends and treasury stock cancellation) relative to net income over five years (2025-2029) is at least 120% of the industry average.

Not only value-up but also scale-up excellent companies can receive benefits. They must have an investment or research and development (R&D) expenditure ratio of at least 5% relative to sales over five years (2025-2029) and an average annual growth rate of at least 5%. They must also maintain employment for five years. Companies that start up in Opportunity Development Zones or relocate from the Seoul metropolitan area to Opportunity Development Zones can receive the same benefits. However, companies that start up or relocate to Opportunity Development Zones will have their business succession deduction applied without limits, further easing their tax burden.

Inheritance Acquisition Tax, Which Taxes What You Receive, Not Included... Comprehensive Real Estate Tax Also Excluded

The much-anticipated conversion to inheritance acquisition tax was not included in this tax law amendment. Currently, inheritance tax is levied on all inherited assets regardless of the actual amount received. Since inheritance tax is a progressive tax system where the rate increases as the amount grows, the current inheritance tax method results in a higher tax burden.

For example, if I inherit 100 million won and my sibling inherits 5 billion won, the total inheritance is 5.1 billion won, so both are subject to the top rate of 50%. This archaic taxation system, which imposes joint tax liability on the family unit, has been criticized for needing major reform. The Ministry of Economy and Finance stated, "Although the introduction of inheritance acquisition tax is not included in this tax law amendment, the reform work will continue to be pursued."

The comprehensive real estate tax reform plan was also excluded. Deputy Prime Minister Choi Sang-mok said, "Since the Yoon Suk-yeol administration, many efforts have been made to reduce the burden of the comprehensive real estate tax, and there are still issues to improve. I agree with the view that fundamental reform is necessary, but since it requires comprehensive consideration of the impact on local finances, it was not included in this tax law amendment." It is analyzed that concerns about a sudden decrease in comprehensive real estate tax, which is fully allocated to local governments, causing a blow to local finances, and the recent rapid rise in housing prices centered on Seoul, which could fuel market instability, influenced this decision.

The 15 tax law amendments announced that day will be open for public comment until July 9, then go through Cabinet approval and be submitted to the regular National Assembly session before September 2. After passing the National Assembly Planning and Finance Committee, the Legislation and Judiciary Committee, and the plenary session, they will be implemented from January 1, 2025. However, the ruling party is expected to face difficulties passing the bill in a National Assembly where the opposition holds a majority, as the major amendments, including inheritance tax relief, are opposed as tax cuts for the wealthy.