[PB Notebook] I Worked Hard to Buy One Home, Only to Pass It On... Prepare for Inheritance Tax Risks

Lim Chaegyu, Wealth Manager at Kyobo Life Insurance's Gangnam Financial Planning Center

Lim Chaegyu, wealth manager at Kyobo Life Insurance's Gangnam Financial Planning Center. Kyobo Life Insurance

In recent years, apartment prices in Seoul and the surrounding metropolitan area have surged. Inheritance tax is no longer a tax paid only by the wealthy; it has become a tax that ordinary middle-class people who own a single apartment may have to pay. Even those who have not lived the so-called “silver spoon” life may face a tax bill worth tens or even hundreds of millions of won after their parents pass away. Once real estate prices rise, they are unlikely to fall easily, making inheritance tax almost inevitable. To prepare, it is important to understand the basic principles of inheritance tax and plan ahead.

Kim, an office worker in his 50s who lives in Seoul, inherited an apartment worth 1.6 billion won and 50 million won in bank deposits after his father, who had been living alone, died suddenly. Before he had time to come to terms with his grief, people around him began worrying that the inheritance tax would be substantial because property prices had risen so much, and asking whether he had enough cash to pay the bill immediately. Kim has no plans to sell the apartment right away, and he does not have tens of millions of won in spare cash. How should he pay the tax?

The inheritance tax deductions differ depending on whether one parent dies while the other is still alive, or whether the surviving parent has also passed away. Under current rules, the largest deductions are the lump-sum deduction of 500 million won and the spouse deduction, which ranges from 500 million to 3 billion won. If a father dies while the mother is still alive, inheritance tax is not imposed on at least 1 billion won: the 500 million won lump-sum deduction plus the minimum spouse deduction of 500 million won.

However, as in Kim's case, if his mother had already passed away and his father had been living alone before he died, the spouse deduction cannot be applied; only the 500 million won lump-sum deduction is available. This means that inheritance tax will be imposed on the remaining 1.15 billion won after deducting 500 million won from Kim's total inherited assets of 1.65 billion won, at the progressive inheritance tax rates.

When calculating inheritance tax, real estate such as apartments and land is generally valued at market price. If an appraisal has been conducted, the appraised value may be accepted as equivalent to the market price. When it is difficult to determine the market price, the officially assessed value or another measure may be used to calculate the value of the inherited property. In the case of apartments, comparable units of the same size or floor area are frequently traded, making it difficult in practice to report inheritance tax based on the officially assessed value.

When inheriting property such as a mixed-use building with a residence or a commercial building, it may be possible to reduce inheritance tax by filing based on the officially assessed value. However, since 2020, tax authorities have been conducting appraisals of properties whose officially assessed values differ substantially from their market prices. These appraisals may reflect higher market prices than appraisals commissioned by taxpayers. For this reason, those inheriting a commercial building or house are advised to consult an expert before filing.

If the inheritance tax amounts to tens or hundreds of millions of won and there is not enough cash to pay it immediately, heirs can use the installment payment system to pay it over a period of up to 10 years. An application for installment payments can be made when the inheritance tax due exceeds 20 million won. Applicants must provide collateral, such as inherited real estate, and an additional interest charge applies because payment is deferred.

Because substantial cash is needed during the inheritance process to cover taxes such as acquisition tax and inheritance tax, it is important to secure funds for these payments in advance. This is why many wealthy people take out insurance to prepare for inheritance tax. Insurance is a financial product for managing risk, and a large inheritance tax bill represents a significant financial risk for the heirs. If Kim already owns a home, he could inherit the property after paying approximately 50 million won in acquisition tax. He would also have to pay about 280 million won in inheritance tax. Even if he applies to pay in installments over 10 years, he would need to pay approximately 26 million to 33 million won a year. Paying about 2.5 million won in inheritance tax every month for 10 years would be a significant burden for most office workers and can certainly be considered a substantial financial risk.

To prepare for this inheritance tax risk, it is necessary to have a strategy for building liquid assets. One option is to plan to build up liquid assets through savings accounts or investment funds. The biggest drawback, however, is that inheritance could occur before the target amount has been saved. Since it is impossible to predict when or how an inheritance will occur, taking out insurance that provides coverage from the beginning of the policy can also be one way to prepare. In particular, personal wealth is growing as the value of assets such as real estate and stocks has recently risen. At the same time, the risk of having to pay inheritance tax at progressive rates of up to 50% is increasing, making it important to secure some liquid assets through insurance in advance.

Chaegyu Lim, wealth manager at Kyobo Life Insurance's Gangnam Financial Planning Center

This content was produced with the assistance of AI translation services.