Gov't tax plan sets the stage for a showdown over cut to inheritance tax

Economy

Published: 25 Jul. 2024, 18:06 Updated: 25 Jul. 2024, 18:48

Gov't tax plan sets the stage for a showdown over cut to inheritance tax

Finance Minister Choi Sang-mok speaks during a press briefing at the government complex in Sejong on Monday, ahead of the announcement of the 2024 Tax Revision Bill on Thursday. [MINISTRY OF ECONOMY AND FINANCE]

The Yoon Suk Yeol administration aims to lower the maximum limit on the inheritance tax rate with the most drastic change in the system in over 20 years as part of its major tax reform initiative announced on Thursday.

Other plans include abolishing capital gains tax and providing tax credits to married couples.

The proposed cuts, requiring approval from parliament, which is controlled by the liberal Democratic Party (DP), are expected to reduce the country’s tax revenue by 4.35 trillion won ($3.15 billion) through 2029.

The Ministry of Economy and Finance released the 2024 Tax Revision Bill on Thursday, a set of tax reform plans announced every year by the government between July and August.

The latest proposal focuses primarily on tax cuts, with the most significant change being the inheritance tax system revision.

If enacted, the revision will mark the first change to the inheritance tax rate and tax base in 25 years.

The government plans to reduce the maximum rate to 40 percent from the current 50 percent, which is the second-highest among OECD member countries following Japan’s 55 percent.

Currently, inherited assets with a value between 1 billion won and 3 billion won are subject to a 40 percent tax rate, while those exceeding 3 billion won are taxed at 50 percent. Under the proposed revision, all assets worth over 1 billion won would be subject to a maximum rate of 40 percent.

Moreover, the threshold for the asset bracket subject to the lowest inheritance tax rate will be raised from the current 100 million won to 200 million won.

On July 3, the government announced that it would abolish the current inheritance tax regulation that levies an additional 10 percentage points on top of the 50 percent cap if the benefactor is the largest shareholder of a company. As such, the absolute maximum inheritance tax rate will drop from 60 percent with the added 10 percentage points for top shareholders to 40 percent.

The proposed revision is likely to face strong headwinds from the DP and minor opposition parties in the National Assembly, as lowering the maximum inheritance tax rate has long been slammed as “tax cuts for the wealthy.”

Finance Minister Choi Sang-mok stressed that “the inheritance tax involves middle-income households as well, as Korea’s economy has expanded significantly over the last 25 years, which passed without any changes to the system,” during a press briefing held at the government complex in Sejong.

Choi also added that the heavy inheritance tax burden “hinders the generational transition within corporations and disrupts the virtuous cycle of the economy.”

Moreover, the planned taxation on virtual assets that was set to take effect in January 2025 will be delayed by an additional two years. The government also reiterated its promise to abolish the capital gains tax scheduled to take effect next year.

For the corporate Korea Value-up Index initiative, aimed at resolving the chronic undervaluation of domestic stocks, the government will provide corporate tax credits in proportion to the increased amount of shareholder returns.

To incentivize marriages and drive up the birthrate, a program will offer newlyweds a tax credit of up to 1 million won. Corporate financial initiatives designed to encourage employees to have children will not be taxed.

The ministry expected the plan to reduce the government’s tax revenue by 4.35 trillion won over the next five years starting next year, with the reduction in the inheritance and gift taxes accounting for 4.06 trillion won.

“As the tax revenue shortfalls for the last two years were the result of an economic slowdown, the situation is expected to improve next year,” said Choi, addressing concerns about the slumping revenue.

“The plan’s impact on tax revenue will be extremely minimal next year,” he contended, adding that “tax policy should be based on a long-term perspective, taking into consideration various issues such as the revitalization of the economy and improvement in the household economy.”

Meanwhile, no revision plan was announced regarding the comprehensive real estate tax.

“As an overhaul of the comprehensive real estate tax system requires further deliberations on its impact on local government budgets and its relation to the property tax, we decided not to include a revision plan for the real estate tax this time,” said the minister.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]