[Korean Law Insights] Key Points in the Discussion of the Inheritance Tax Law Amendment

[Published on March 18, 2025 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]

• Possible expansion of deductions and abolition of inheritance tax for spouses

• Lower tax rates and higher deductions expected under the inheritance acquisition tax system

On March 12, 2025, the South Korean government announced a proposed amendment to the inheritance tax law. In addition, the political sector is actively discussing various proposals related to inheritance tax reform. Although it will take considerable time and procedural steps before any amendment passes through the National Assembly and is implemented, the current discussion is more specific and promising than ever before. Therefore, understanding the key points of the proposed amendments in advance will be helpful for those planning future inheritances.

The most prominent topic in these discussions concerns the treatment of spouses. Since spouses typically contribute more to the accumulation of wealth than children and belong to the same generation as the deceased, there is a need for special consideration in inheritance matters. Under current Korean inheritance law, a spouse is entitled to 1.5 times the inheritance share of a child, and the spouse's deduction for inheritance tax is also larger than that of a child. However, many have argued that the current spouse's share and deduction amount do not adequately reflect reality. Consequently, in the current discussions—particularly concerning inheritance tax—these aspects have become a central issue. According to the government proposal, the entire amount of inheritance up to 1 billion KRW received by a spouse would be fully deductible. In the political sphere, there is even discussion about abolishing inheritance tax for spouses altogether.

Another major issue is the reduction of the top tax rate and the increase of the taxable base to which the top rate applies. Under current law, if the taxable inheritance amount exceeds 3 billion KRW, a 50% inheritance tax rate applies. When the premium for being a major shareholder is added, the rate can rise to 60%, which is nearly punitive. South Korea has the second-highest top inheritance tax rate among OECD countries, after Japan, which can lead to capital outflows, emigration, and tax avoidance. As a result, some are proposing to reduce the top tax rate to 30% or raise the taxable base to 10 billion KRW. However, these changes were not included in the government’s proposal (though future discussion remains possible), and political consensus on this matter seems unlikely at present.

Additional discussions include raising the deduction for children and revisions related to business succession, both of which are included in the government proposal. However, the most significant potential change in the government plan is a shift in the taxation method itself. The current law applies the estate tax method, in which tax is levied based on the total estate of the deceased. On the otehr hand, the proposed amendment would switch to the inheritance acquisition tax method, in which tax is calculated based on the actual amount each heir receives, and deductions are also applied individually per heir. In this system, lower tax rates and higher deductions are more likely, especially when there are multiple heirs, making it more advantageous.

Currently, if the deceased is a South Korean resident, inheritance tax is imposed, and only a basic deduction of 200 million KRW is applied. The new proposal suggests that both the deceased and the heirs should be considered when determining tax liability, and that personal deductions be applied individually to each heir.

Planning an inheritance inevitably affects how one manages and disposes of assets during their lifetime, and inheritance tax is a crucial factor in that planning. Therefore, being aware of the key points in the proposed amendments is essential. Although the government’s proposal is unlikely to be enacted exactly as-is and will ultimately reflect political consensus, it is important to keep a close watch on how the situation develops.

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Jin Hee Lee/K-Law Consulting Korean Attorney

[Reference link in original Korean] 

https://www.koreadaily.com/article/20250318233605961