Outdated Inheritance Tax Burdens the Middle Class... Will the Spousal Deduction Limit Be Revised? [Tax System, Time for Change]

The inheritance tax reform plan is not expected to be included in the first tax law amendment bill of the Lee Jaemyung administration. However, the government has decided to review the expansion of the spousal deduction limit, which was verbally agreed upon by both ruling and opposition parties before the presidential election, as a medium- to long-term task. There are also growing calls for an urgent overhaul of the entire inheritance tax system to make it more reasonable, as the outdated tax regime has failed to keep up with economic changes such as rising housing prices, resulting in inheritance tax on some high-asset individuals effectively turning into a tax burden for the middle class.

According to relevant ministries on July 10, the Ministry of Economy and Finance has decided not to include an inheritance tax reform plan in the tax law amendment bill to be announced at the end of this month. Earlier, in March, the government unveiled a draft inheritance tax reform plan that included switching the taxation method from an estate tax to an inheritance acquisition tax, raising the personal deduction amount for direct lineal descendants and ascendants from the current 50 million won to 500 million won, and to 200 million won for other heirs (newly established), and increasing the minimum deduction for spouses from 500 million won to 1 billion won.

Since both ruling and opposition parties had verbally agreed to measures to reduce the inheritance tax burden on spouses even before the presidential election, there were strong expectations that the increase of the minimum spousal deduction to 1 billion won from the previous government’s proposal would be included in the new administration’s tax law amendment. There have been repeated criticisms that it is unfair to impose tax only on inheritance, while no gift tax is levied when property is divided in a divorce in recognition of contributions made during marriage.

In fact, among the three countries in the OECD that have an estate tax system similar to Korea?namely, the United States, the United Kingdom, and Denmark?not a single country imposes inheritance tax on spouses. In March, when the People Power Party pushed for the abolition of spousal inheritance tax, President Lee Jaemyung actively supported inheritance tax reform, saying, "I agree, so let's proceed immediately," but such content was not included in his presidential campaign pledges.

Yonhap News Agency

Discussions on inheritance tax reform have continued since 2021, during the Moon Jaein administration. This reflects the reality that inheritance tax has become a "tax paid by the middle class" rather than a levy exclusively for the wealthy. According to the National Tax Statistics Yearbook, the proportion of the deceased (decedents) subject to inheritance tax (inheritance tax assessment ratio) surged from 0.7% in 2000 to 5.9% at the end of last year. In 2000, there were 1,389 people subject to inheritance tax out of 212,000 deaths, but in 2024, the number rose 14-fold to 21,193 out of 358,400 deaths. Since this figure is based on decedents subject to taxation, the actual proportion of inheritance tax payers is estimated to be much higher.

Under current law, only 1,255 decedents (based on filings), or about 6.2% of the total, fall into the highest tax bracket (50% for taxable estates exceeding 3 billion won). In contrast, 11,468 decedents (57%) had a taxable estate of 500 million won or less, accounting for well over half. Even after receiving the basic deduction of 1 billion won (500 million won spousal deduction + 500 million won general deduction), several hundred million won may still be subject to tax. Considering that the average apartment sale price in Seoul now exceeds 1.345 billion won, inheriting just one middle-class home in Seoul could result in a hefty tax bill. Given that the purpose of the inheritance tax is to prevent intergenerational transfer of wealth and strengthen equality, it is argued that it is unreasonable for the middle class to bear the inheritance tax burden as well.

There is ongoing debate over which taxation method?estate tax or inheritance acquisition tax?is more reasonable in terms of tax fairness and justice. For example, if one child inherits 2 billion won, and five children each inherit 2 billion won from a 10 billion won estate, the latter group will pay much more inheritance tax. This is because the progressive tax structure increases the rate as the taxable base grows. Therefore, the current estate tax system, which applies a higher tax rate than the actual inheritance received, is argued to violate the principle of "paying according to what you receive." However, there are differing views on whether children should pay more tax when the estate is larger, or whether the tax burden should be the same if each child receives the same amount.

A government official said, "In order for tax relief to lead to a virtuous cycle of consumption and investment, we believe that the inheritance tax rate itself should be lowered to the level of advanced countries in the long term." The official added, "However, if the inheritance tax is switched to an inheritance acquisition tax, the decline in tax revenue is expected to be significant, and there could be controversy over tax cuts for the privileged. Therefore, we will pursue steady and predictable reforms at an appropriate time."