The South Korean government unveiled plans on March 12 to overhaul its long-criticized inheritance tax system, announcing a major transition from the estate tax method to the inheritance acquisition tax approach. This overhaul is intended to reduce the tax burden on citizens and align the system with international standards, with full implementation targeted for 2028.
The announcement signifies the first substantial reform of the inheritance tax system since its establishment 75 years ago, back in 1950. Currently, South Korea, alongside the United States, United Kingdom, and Denmark, is among only four members of the Organization for Economic Cooperation and Development (OECD) still using the estate tax method. This method taxes the total inheritance assets of the deceased, creating significant disparities within family inheritances. For example, under the existing law, if three children each inherit 50 million won (roughly $38,000), they collectively face inheritance tax liabilities totaling 24 million won ($18,500). Conversely, if just one child inherits 50 million won, no tax is applied, showcasing the inconsistencies of the current system.
According to the Deputy Minister of Strategy and Finance, Cho Jong-fun, the reform has been motivated by numerous requests and directives to switch to a system closer to global practices. The government is set to announce its legislative proposal this month, with hopes to submit the bill by May 2025.
One of the central aspects of this overhaul involves significantly increasing the tax exemptions available for spouses and children. Currently, the minimum spousal deduction stands at 500 million won ($385,000), which will be doubled to at least 100 million won ($77,000) under the new system. By enhancing these deductions, the government aims to relieve the tax burdens associated with large inheritance shares, particularly benefitting families.
For example, if families receive inheritances totaling 200 million won, the current system would allow for waivers of the inheritance tax only up to 100 million won. The planned new system, which institutes the inheritance acquisition tax framework, aims to provide each child with deductions amounting to 50 million won, thereby eliminating any inheritance tax due on the entire 200 million won.
This adjustment is particularly noteworthy as it encourages larger families, with the potential to positively impact South Korea's long-standing low birth rate issue. Increased exemptions under the new rules indicate governmental recognition of the need to incentivize larger family units amid declining birth rates.
Despite these advancements, some elements from the current system will persist. The maximum limit for inheritance tax deductions will remain at 300 million won ($230,000), and the government has not moved forward with abolishing inheritance tax completely for spouses.
The effectiveness of the proposal will likely be assessed against its predecessors, which included plans to reduce the highest inheritance tax rate and address other inequities, such as abolishing the premium for major shareholders. These proposals have been set aside for future consideration following social consensus.
Experts have noted the necessity of this reform. Professor Kim Woo-chul from Seoul City University’s Department of Taxation remarked, "We should have transitioned to the inheritance acquisition tax system much earlier; there is no doubt we have lagged. The elimination of the inheritance tax for spouses should also be on our radar." His comments reflect broader concerns about the fairness and efficiency of the taxation system surrounding inheritances.
Transitioning to the inheritance acquisition tax model not only aims to resolve current inequities but is expected to simplify the inheritance tax process, enhancing clarity for heirs and reducing administrative burdens linked to the current estate tax model.
Overall, this significant reform initiative is poised to reshape how inheritances are taxed, making it more equitable and conducive to larger families, by aligning South Korea’s tax framework with global norms. With both potential benefits and critiques surrounding its implementation, the forthcoming legislation will undoubtedly influence the fiscal responsibilities of many South Korean families during their most vulnerable times.