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Death tax set for overhaul, shifting focus to individual inheritance

Published: 12 Mar. 2025, 12:20 Updated: 12 Mar. 2025, 17:23

SHIN HA-NEE
[email protected]

Jeong Jeong-hoon, third from left, head of the tax and customs office at the Ministry of Economy and Finance, speaks during a press briefing at the government complex in Sejong on March 11. [YONHAP]

Korea will overhaul its death tax system, shifting from a tax on the entire estate left by the deceased to taxing the amount each beneficiary receives.

The revision proposal, announced by the Ministry of Economy and Finance on Wednesday, marks the first such reform since the law’s enactment in 1950.

The shift from the current estate tax to an inheritance tax is aimed at ensuring fairer taxation by taxing what a beneficiary actually receives while also enhancing the efficiency of the tax deduction system, the ministry said.

Korea is among the four Organisation for Economic Cooperation and Development (OECD) member nations that use the estate tax system, along with the United States, Britain and Denmark. Twenty nations, including Japan, Germany and France, adopted the inheritance tax system.

The OECD has previously suggested that the inheritance tax system may be more equitable as it encourages the naming of multiple beneficiaries of an estate. The International Monetary Fund also pointed out that an inheritance tax is more preferable as “it is directly linked to wealth inequality after the transfer.”

As the current estate tax is progressive, meaning tax rates increase along with asset value, switching to an inheritance tax would reduce duties when there are multiple heirs.

A bank employee sorts 50,000 won ($34) bills at Hana Bank headquarters in Jung District, central Seoul on May 8, 2023. [YONHAP]

Under the estate tax system, with a comprehensive deduction cap of 500 million won ($344,000), three heirs inheriting 500 million won each would be taxed based on the combined estate of 1.5 billion won, resulting in each heir paying 80 million won.

The new inheritance tax system will tax each recipient individually based on their respective inheritance. As long as each heir’s inheritance meets or falls below the maximum deductible amount of 500 million won per individual, no tax will be due.

Therefore, the current 500 million won comprehensive deduction cap will be replaced with an individual deduction. For the children of a decedent, the deduction limit will increase from 50 million won to 500 million won. For spouses, inheritance of up to 1 billion won will be exempt from taxes, up from 500 million won.

Moreover, taxation will be decided based on the residence of both the decedent and the recipient.

Currently, if the decedent lived in Korea, both domestic and overseas assets are taxed, while only domestic assets are taxed if they lived overseas. Under the revised rule, all assets will be taxed if either the decedent or the heir resides in Korea, while only domestic assets will be taxed if both lived abroad.

The transition from the current estate tax system to an inheritance tax system, combined with an increased deductible cap announced last year, is expected to reduce death tax revenue by more than 2 trillion won, according to the ministry’s estimate.

“Countries like Norway, which is an advanced economy with active social mobility, abolished inheritance taxes altogether — does that mean they gave up on social mobility?” Jeong Jeong-hoon, head of the ministry’s tax and customs office, said during a press briefing on Tuesday in response to a question about whether the proposed revision would hinder the redistribution of wealth.

“For sustainable growth and wealth distribution, we need to make reasonable changes to the system, moving past our previous reluctance to address it,” said Jeong.

However, the government’s latest announcement did not include other proposed changes, such as lowering the maximum tax rates, which were put forward in July last year.

“We still believe that all our tax reform proposals last year, including lowering the maximum tax rate, are necessary,” said Jeong. “We plan to move forward with other agenda items as well after public discussion.”

The government plans to put forward a bill for legislative revision on the estate tax in May. The reform measures will take effect in 2028.

While Korea’s two major parties appear to have reached a tentative agreement on abolishing the spousal death duty — which was not included in the ministry’s proposal — whether the liberal Democratic Party (DP) would get on board the bill remains to be seen. DP lawmaker Rep. Lim Gwang-hyeon openly criticized the proposal as “tax cuts for the rich” on Wednesday.

Updated, March 12: Added details of the proposal and comments from the Ministry of Economy and Finance.

BY SHIN HA-NEE [[email protected]]