South Korea’s Ministry of Economy and Finance (MOEF) has announced 191 tax law revisions, including a significant reform of the inheritance and gift tax system, which will take effect in 2025. This marks the first change in 28 years.
The revisions include raising the per-child deduction limit from 50 million won to 500 million won and lowering the highest tax rate from 50% to 40%. Additionally, the 20% surcharge on inheritances from major shareholders will be abolished, and the deduction limit for business inheritance tax for companies that increase dividends will be raised from 60 billion won to 120 billion won.
South Korea’s inheritance tax system is notably heavier than that of other developed countries. The average maximum inheritance tax rate among the 38 OECD countries is 13%, while South Korea’s is 50%, second only to Japan’s 55%. The inheritance tax deduction limits have remained unchanged since 1997 despite a 96% increase in inflation and a 3.8-fold rise in per capita income during this period.
As a result, even owning a single apartment in Seoul can lead to significant inheritance tax concerns. This is not the intended purpose of inheritance tax. Approximately 40% of apartments in Seoul are valued at over 1 billion won, exceeding the basic deduction (500 million won) and spouse deduction (500 million won), subjecting them to inheritance tax.
In 2000, 39,000 individuals paid inheritance and gift taxes. By 2022, this number had risen to 268,000, making these taxes a burden on the middle class. Typically, 80% of an average South Korean household assets are in real estate. It is not reasonable for families to be forced to sell their homes to pay inheritance taxes upon the death of a family member. In contrast, the federal inheritance tax exemption in the United States was as high as $12.9 million last year.
It is only right to adjust the long-neglected inheritance tax system to reflect current realities. The MOEF’s proposed reforms could reduce annual inheritance and gift tax revenues by approximately 4 trillion won. This shortfall can be offset by restructuring government spending, including the 68 trillion won allocated to local education finances this year, which is reportedly searching for spending outlets.
The 191 tax law amendments announced by the MOEF are crucial as they significantly impact citizens’ lives. However, there is a sense of detachment from reality, as 168 of the amendments (88%) require legislative changes, excluding those that can be handled through executive orders.
The ruling People Power Party, with only 108 seats, can do little if the main opposition Democratic Party (DP) opposes the reforms. Fortunately, DP leader Lee Jae-myung has prioritized public welfare, and there are calls within the DP for improvements in inheritance and property taxes. If the DP moves away from outdated perspectives, the public will take notice.
