We are Murata Sogo Tax Accounting Office, with offices in Osaka City, specializing in international taxation and asset taxation.
This time, we would like to explain primary and secondary inheritances, which are often consulted by our clients when filing inheritance tax returns.

１．What is Secondary Inheritance?

Secondary inheritance refers to the occurrence of inheritance due to the death of the spouse who was the heir in the primary inheritance.
For example, in a family of four, consisting of parents and two children, the primary inheritance is when the father dies first and the estate is inherited by the spouse and children, followed by the secondary inheritance when the mother dies and the estate is inherited by the children.
In the secondary inheritance, the inheritance tax is generally higher than in the primary inheritance. Since the division of the estate in the primary inheritance often affects the inheritance tax burden in the secondary inheritance, it is necessary to carefully consider the division of the estate in the primary inheritance and the subsequent measures to be taken until the secondary inheritance occurs. 

２．Reasons Why Inheritance Tax will Increase with the Second Inheritance

(1) Inapplicability of spousal tax reduction

Under the inheritance taxation, if a spouse inherits assets, inheritance tax is reduced on the amount of assets up to 160 million yen or the spouse's legal share of inheritance, whichever is greater.
This is called "spousal tax credit".
In the second inheritance, the spouse is not an heir, so spousal tax credit does not apply. On the other hand, since spousal tax credit applies to the primary inheritance, the inheritance is usually passed on to the spouse in larger amounts.
The amount of inheritance to the spouse in the primary inheritance may be larger because of the application of the spouse's tax credit. In this case, inheritance tax will be imposed on the sum of the assets inherited to the spouse and the spouse's own assets at the time of the second inheritance, but since there is no spousal tax credit, the amount of inheritance tax will be quite high.

(2) Decrease in Basic Exemption

In the inheritance tax, there is a "basic exemption" which can be deducted from the total amount of the estate for the purpose of calculating the tax. The basic allowance is calculated as follows: [number of legal heirs x 6 million yen + 30 million yen].
In the case of a second inheritance, the basic exemption is reduced by 6 million yen because the number of legal heirs is reduced by one.

(3) Decrease in the Tax Exemption Limit for Insurance and Benefits for Death

There is a tax exemption limit of 5 million yen per legal heir for death insurance and death benefits, respectively. For example, if a wife and two children are the legal heirs in a primary inheritance, the tax exemption limit is 15 million yen, but in a secondary inheritance, there are only two legal heirs, so the tax exemption limit is 10 million yen. This also leads to an increase in inheritance tax.

３．Preparation and Measures for Secondary Inheritance

(1) Partition the estate with a view to the second inheritance at the primary inheritance stage.

It is important to divide the estate at the primary inheritance stage with a view to the second inheritance. In particular, even if the amount of inheritance tax is reduced due to the application of the spouse's tax reduction in the primary inheritance, the overall amount of tax including the secondary inheritance may be higher. It is necessary to discuss the estate division agreement with a view to the second inheritance and take appropriate measures.
For example, if the spouse inherits an amount sufficient for living expenses, and the children inherit the amount exceeding that amount, the risk of a high inheritance tax due to a second inheritance can be reduced.

(2) Use of Living Gifts

Another possible method is to use gifts given before death. Under the calendar year gift taxation, gifts of up to ¥1.1 million per year are exempt from taxation.
For example, if a spouse inherits a 10 million yen estate at the time of the first inheritance, and then makes annual gifts of 1 million yen over the following 10 years, no gift tax will be imposed, and since the property is transferred to the children at the time of the second inheritance, no inheritance tax will be imposed either.
However, it is important to make the gift before death as early as possible, since any property donated during one's lifetime but within three years prior to the start of inheritance is subject to inheritance tax.

Even if you have received a primary inheritance or have not yet received an inheritance, it is important to prepare for inheritance tax as early as possible.
If you have any questions or concerns about inheritance tax, please feel free to contact us using our contact form.