#4 What Happens When Japan and Your Home Country Both Want to Tax Your Estate

The cross-border layer that changes everything — and why a Japan-only strategy may only be solving half the problem.

THE HALF NOBODY TALKS ABOUT

The family holding company we described in #02 solves your Japan inheritance tax problem. For some readers, that's the complete picture. For others — Americans, British, Germans, and several others — it solves half of it.

Japan taxes based on where you live. Your home country may tax based on who you are. These are two different rules, operating simultaneously, on the same assets.

"Japan's inheritance tax is the problem you can see. Your home country's may be the one you can't."

THE ANALOGY

Think of it like two landlords both claiming rent on the same apartment — because you signed two leases on two different legal theories. A tax treaty is the negotiation framework between them. It doesn't make one landlord disappear. It determines how much each collects and in what order. And the negotiation is complicated.

COUNTRY BY COUNTRY

The risk profile varies significantly by nationality. Here is the honest picture for the three largest foreign resident groups in Japan.

United States — Highest complexity

The United States is one of only two countries in the world that taxes its citizens on worldwide assets, regardless of where they live. A US citizen who has lived in Tokyo for 20 years, owns no property in America, and has built an entirely Japan-based estate is still subject to US federal estate tax.

The current federal exemption is high — but tax legislation changes. The provisions that set the current exemption level are scheduled to expire at the end of 2025, and if not renewed, the threshold may approximately halve. The US-Japan estate tax treaty (1954) provides some credit relief, but it is not a simple offset. The interaction is fact-specific and requires a cross-border specialist to model correctly.

There is a second layer. The Japanese family holding company structure described in #02 may create additional US tax complexity. A foreign corporation with predominantly passive assets — rental income from real estate — can trigger US rules that affect how income inside the company is treated for US tax purposes. A structure designed only with Japanese tax in mind may be working against you in ways that are not immediately visible.

Bottom line: You need a US-qualified estate attorney and a Japanese 税理士 working together from the design stage. Not sequentially. Together.

United Kingdom — Medium-high complexity

The UK uses a concept called domicile — not residency — to determine inheritance tax exposure. Your domicile is roughly where you intend to make your permanent home. It is not where you currently live. And crucially: it is very difficult to change.

Most UK citizens living in Japan remain UK-domiciled in the eyes of HMRC, because domicile of origin requires active legal steps to abandon — steps that most people have not formally taken. If you are UK-domiciled, UK Inheritance Tax applies to your worldwide assets at 40% above the nil-rate band, regardless of your Japan residency.

An additional layer: the UK changed its non-domicile tax rules in 2025. Under the new regime, long-term UK residents — broadly, those resident in the UK for 15 of the past 20 years — are treated as domiciled for inheritance tax purposes. For UK nationals who have spent significant time in the UK before moving to Japan, this threshold may already have been crossed.

A UK-Japan double taxation convention on estates exists, providing some relief. But the interaction between Japanese unlimited liability and UK worldwide domicile exposure is not automatically resolved by the treaty alone.

Bottom line: The first question to answer is your domicile status. Most UK residents in Japan assume they've acquired Japanese domicile. Most haven't.

Australia — Lower direct tax, hidden layer

Australia abolished federal inheritance tax in 1979. At the headline level, there is no Australian estate tax. For most Australian residents in Japan, this means Japan is the primary jurisdiction to manage.

However, Australia operates a capital gains tax on death — assets in a deceased estate are generally treated as if sold at market value, potentially triggering CGT on unrealised gains. Certain assets, including a main residence, may qualify for exemption. For Australians holding Japanese real estate or shares in a Japanese family holding company, the CGT exposure at death warrants review before assuming the Australia side is clean.

Bottom line: Lower urgency than US or UK, but the CGT-at-death layer is worth understanding before assuming you have no home-country exposure.

Other nationalities worth noting

Germany taxes estates based on domicile, with progressive rates ranging from 7% to 30% for direct descendants and up to 50% for non-relatives — and a Germany-Japan tax treaty in place.

France uses a similar domicile-based approach, with rates up to 45% for direct descendants on amounts above the highest threshold.

Canada has no estate tax, but operates deemed-disposition rules at death — assets are treated as sold at fair market value, potentially triggering capital gains tax on unrealised gains.

If your home country is not listed: the question to research is whether it taxes worldwide estates based on citizenship or domicile, and whether a Japan treaty exists. If yes to either, the framework below applies.

THE TRAP

"The treaty handles this."

This is the most common — and most expensive — assumption in cross-border estate planning.

Tax treaties between Japan and most developed countries do provide credit mechanisms. If you pay Japanese inheritance tax, you can often credit a portion of it against your home country's liability. This prevents fully paying both bills in parallel.

What treaties do not do: eliminate one country's claim entirely. They govern the order of priority, the basis for credit, and the method for calculating the offset. The interaction is specific to the structure of your assets, the nature of the tax assessed, and the precise treaty provisions that apply — which vary significantly between the US, UK, German, and other treaties.

A Japan-only advisor cannot give you this analysis. An advisor in your home country who doesn't know Japanese tax law cannot give it either. The picture requires both.

"A Japan-only strategy gives you half the picture. For most foreign residents, that's the half that feels solved — and the half that isn't."

WHAT THIS MEANS FOR YOUR JAPAN STRUCTURE

A family holding company designed purely for Japanese tax efficiency may be optimized in one jurisdiction and create complications in another. The structure that works for a Japanese national may not be the structure that works for an American, a British national, or a German.

The correct order of operations: understand both systems first, then design a structure that works within both simultaneously. Not: build a Japan structure, then add the cross-border layer later. Later is expensive.

"Two countries claiming your estate isn't a hypothetical. For some readers of this series, it is the default."

YOUR MOVE

If you hold a US passport: before any other planning step, get a US-qualified estate attorney and a Japanese 税理士 in the same conversation. Reply to this email with "US cross-border" — I'll connect you with a dual-jurisdiction specialist team in Tokyo.

If you hold a UK passport: the first question is domicile status, not tax rates. Reply with "UK cross-border" — I'll point you to the right specialists.

If you hold an Australian passport: Japan is your primary exposure. But confirm the CGT treatment of your Japanese assets with a cross-border Australian tax advisor before finalising your Japan structure. Reply with "AU review" for a connection.

If your passport is not listed: reply with your nationality. I'll share what I know about the Japan interaction and where specialist advice is needed.

WHAT COMES NEXT

#05 shifts from structure to timing. It answers a question that often goes unasked: what does waiting five or ten years actually cost, in concrete numbers? The answer is not intuitive, and for most readers it is the single most persuasive argument for starting sooner.

This article is for informational purposes only and does not constitute tax, legal, or financial advice. Cross-border estate planning involves complex interactions between multiple jurisdictions. Tax laws change. Treaty interpretations vary. Please consult qualified advisors in each relevant jurisdiction before making any decisions.