How to Calculate Inheritance Tax: Step-by-Step Guides for UK, US, and Japanese Estates

For Hong Kong residents with multi-jurisdictional assets, the inheritance tax (IHT) landscape has shifted materially in 2025. The UK’s Spring Budget 2025, effective 6 April 2025, abolished the non-domiciled (non-dom) tax status, replacing it with a residence-based regime that subjects all long-term UK residents to worldwide IHT after 10 years of residence. Simultaneously, the US Internal Revenue Service (IRS) maintained its US$13.61 million estate tax exemption for 2025 (IRS Revenue Procedure 2024-40), but this threshold is scheduled to revert to approximately US$7 million on 1 January 2026 under the Tax Cuts and Jobs Act sunset provisions. Japan’s inheritance tax regime, governed by the Inheritance Tax Act (Act No. 73 of 1950, as amended), continues to apply a progressive rate of up to 55% on worldwide assets for residents with a jusho (domicile) in Japan for more than 10 years. For Hong Kong families holding property, equities, or business interests across these three jurisdictions, the absence of a unified calculation method creates significant compliance risk. This guide provides step-by-step methodologies for calculating IHT liability in the UK, US, and Japan, using current 2025 rates, thresholds, and reliefs.

UK Inheritance Tax: The Residence-Based Regime from April 2025

The UK’s IHT regime, governed by the Inheritance Tax Act 1984 (IHTA 1984), underwent its most significant reform in decades on 6 April 2025. The abolition of the non-dom status means that any individual who has been UK resident for at least 10 of the past 20 tax years is now deemed domiciled for IHT purposes, exposing their worldwide estate to UK IHT at 40% above the nil-rate band (NRB).

Step 1: Identify the Deceased’s Domicile and Residence Status

The starting point is determining whether the deceased was UK-domiciled or deemed domiciled under the new rules. Under the Finance Act 2025, a person becomes deemed domiciled for IHT after 10 years of UK residence, and remains so for 3 years after leaving the UK. This replaces the previous 17-year rule under the Finance Act 2013. For Hong Kong residents who moved to the UK after 2015, many will now fall within this 10-year window.

• UK-domiciled or deemed domiciled: Worldwide assets are subject to UK IHT.
• Non-UK domiciled (and not deemed): Only UK-situated assets are subject to IHT, provided the individual has not been UK resident for 10 years.

Data point: HMRC statistics for 2022-2023 (latest available) show that IHT receipts reached £7.1 billion, a 15% year-on-year increase (HMRC, 2024). The 2025 reforms are expected to add an estimated £2.5 billion annually to this figure, according to the Office for Budget Responsibility’s March 2025 forecast.

Step 2: Calculate the Gross Estate Value

The gross estate includes all assets in which the deceased had a beneficial interest at death, valued at open market price on the date of death. Key categories:

• UK property: Valued by a RICS-qualified surveyor. No deductions for mortgages.
• Cash and bank accounts: Sterling balances, plus foreign currency converted at the HMRC spot rate on the date of death (published monthly).
• Investments: Listed shares valued at the lower of the bid and offer price on the date of death (HMRC Manual IHTM18012).
• Life insurance policies: Only if written in trust, proceeds are excluded. If not in trust, the payout is included in the estate.
• Pensions: Defined contribution pensions are generally excluded if the member dies before age 75 and the pension is in a drawdown or flexi-access arrangement (IHTA 1984, s. 151).

Example: A deceased holds a Hong Kong property valued at HKD 15 million (approx. £1.5 million at 1 HKD = 0.10 GBP), a UK flat valued at £800,000, and a BVI company holding US equities worth US$2 million. Under the new deemed domicile rules, all assets are subject to UK IHT.

Step 3: Apply Reliefs and Exemptions

Three key reliefs reduce the taxable estate:

1. Nil-rate band (NRB): £325,000 per individual (IHTA 1984, s. 8A). Unused NRB can be transferred to a surviving spouse.
2. Residence nil-rate band (RNRB): £175,000 (2025-2026) for a main residence passed to direct descendants. Tapered by £1 for every £2 of net estate above £2 million (IHTA 1984, s. 8E).
3. Spouse exemption: Transfers between UK-domiciled spouses are exempt (IHTA 1984, s. 18). For non-UK domiciled spouses, the exemption is limited to £325,000, unless the spouse elects to be treated as UK-domiciled (IHTA 1984, s. 18A).

Calculation example:

• Gross estate: £4.3 million
• Less: NRB (£325,000) + RNRB (£175,000) = £500,000
• Taxable estate: £3.8 million
• IHT at 40%: £1.52 million

Step 4: Deduct Business and Agricultural Relief

Business Property Relief (BPR) at 100% applies to unlisted trading company shares held for at least 2 years (IHTA 1984, s. 104). Agricultural Property Relief (APR) at 100% applies to farm land in the UK (IHTA 1984, s. 116). For Hong Kong families with private company holdings, BPR is a critical planning tool.

US Estate Tax: The $13.61 Million Exemption and the 2026 Cliff

The US imposes a federal estate tax on the worldwide estate of US citizens and domiciliaries, and on US-situated assets of non-resident non-citizens (NRNCs). The 2025 exemption of US$13.61 million per individual (US$27.22 million for married couples) is scheduled to sunset on 31 December 2025, reverting to approximately US$7 million (adjusted for inflation) on 1 January 2026.

Step 1: Determine the Deceased’s US Tax Status

• US citizen or domiciliary: Worldwide estate subject to US estate tax. Domicile is defined as living in the US with intent to remain permanently (US Treasury Regulation §20.2001-1).
• Non-resident non-citizen (NRNC): Only US-situated assets are subject to US estate tax, with a US$60,000 exemption (Internal Revenue Code §2101).

Critical for Hong Kong residents: Holding US equities through a US brokerage account or direct ownership of US real estate triggers US estate tax exposure. The US$60,000 exemption for NRNCs is extremely low compared to the US$13.61 million for residents.

Step 2: Value the Gross Estate

The gross estate includes all property owned at death, valued at fair market value on the date of death (IRC §2031). For NRNCs, only US-situated assets are included:

• US real estate: Full market value.
• US stocks and bonds: Valued at the date-of-death market price. Shares in a US corporation are US-situated, even if held in a non-US brokerage account (IRC §2104(a)).
• Bank deposits: US bank deposits are generally excluded for NRNCs if not effectively connected with a US trade or business (IRC §2105(b)).
• Life insurance: Proceeds from a US insurance policy are included in the gross estate if the deceased had any incidents of ownership (IRC §2042).

Example: A Hong Kong resident owns a New York apartment valued at US$5 million and holds US$3 million in Apple shares through a Hong Kong broker. Both assets are US-situated for NRNC purposes.

Step 3: Apply the Unified Credit and Exemption

• For US citizens/domiciliaries: The unified credit of US$13.61 million (2025) offsets the tax completely for estates below this threshold. Above it, the tax rate is 40% on the excess (IRC §2001).
• For NRNCs: The exemption is US$60,000, meaning any US-situated estate above US$60,000 is taxable at a progressive rate from 18% to 40% (IRC §2101(b)). The first US$60,000 is exempt, but the effective rate on the next US$100,000 is approximately 26%.

Calculation for NRNC:

• US-situated estate: US$8 million
• Less: US$60,000 exemption
• Taxable estate: US$7.94 million
• Tentative tax (IRC §2001 schedule): Approximately US$3.18 million
• Less: Unified credit for NRNC: US$13,000 (limited under IRC §2102(c)(1))
• Net tax due: Approximately US$3.17 million

Step 4: Consider the Marital Deduction and Portability

The unlimited marital deduction applies to transfers to a surviving spouse who is a US citizen (IRC §2056). For non-citizen spouses, the deduction is limited to a Qualified Domestic Trust (QDOT) (IRC §2056A). Portability allows the surviving spouse to use the deceased spouse’s unused exemption amount (IRC §2010(c)), but this is only available for US citizens and domiciliaries.

Japanese Inheritance Tax: The 55% Maximum Rate on Worldwide Assets

Japan’s inheritance tax (sōzokuzei) is governed by the Inheritance Tax Act (Act No. 73 of 1950). For residents with a jusho (domicile) in Japan for more than 10 years, worldwide assets are subject to tax at progressive rates from 10% to 55%. For non-residents, only Japanese-situated assets are taxed.

Step 1: Determine the Deceased’s Tax Status

• Resident with jusho for 10+ years: Worldwide assets subject to Japanese IHT.
• Resident with jusho for less than 10 years: Only assets in Japan plus foreign assets brought into Japan within the last 5 years.
• Non-resident: Only Japanese-situated assets (e.g., Japanese real estate, Japanese bank accounts, shares in Japanese companies).

Key rule: Japanese tax law applies a concept of zairyō shikaku (residence status) combined with factual domicile. A Hong Kong resident who holds a Japanese permanent resident visa and lives in Tokyo for 300+ days per year is likely deemed to have jusho.

Step 2: Calculate the Gross Estate Value

The gross estate includes all assets owned at death, valued at the date-of-death market price under the Basic Notice on Inheritance Tax Valuation (National Tax Agency, 2024). Key categories:

• Real estate: Valued using the rosenka (roadside price) method, typically 80% of market value.
• Financial assets: Listed shares valued at the average of the closing price on the date of death, the previous month’s average, and the previous two months’ average (Article 23 of the Inheritance Tax Valuation Notice).
• Life insurance: Proceeds are included in the gross estate, but a deduction of JPY 5 million per statutory heir is available (Article 12 of the Inheritance Tax Act).
• Business assets: Valued using the net asset method or dividend yield method for unlisted shares.

Step 3: Apply the Basic Deduction and Tax Rates

The basic deduction is calculated as: JPY 30 million + (JPY 6 million × number of statutory heirs) (Article 15 of the Inheritance Tax Act). For a family with two children and a spouse (total 3 heirs), the deduction is JPY 30 million + (JPY 6 million × 3) = JPY 48 million.

Tax rates are progressive (Article 17 of the Inheritance Tax Act):

Taxable Base (JPY)	Rate
Up to 10 million	10%
10 million to 30 million	15%
30 million to 50 million	20%
50 million to 100 million	30%
100 million to 200 million	40%
200 million to 300 million	45%
300 million to 600 million	50%
Over 600 million	55%

Step 4: Calculate Tax Liability by Heir

The total tax is calculated on the aggregate estate, then apportioned among heirs based on their statutory share under the Japanese Civil Code (Articles 900-902). A spouse receives a reduced rate: the tax on the spouse’s share is capped at the lower of the calculated amount or the amount that would result in a tax equal to 50% of the spouse’s share (Article 19-2 of the Inheritance Tax Act).

Example:

• Gross estate: JPY 500 million (approx. US$3.3 million)
• Less: Basic deduction (spouse + 2 children): JPY 48 million
• Taxable estate: JPY 452 million
• Total tax (using progressive rates): Approximately JPY 157 million
• Spouse’s share (statutory 50%): JPY 226 million
• Spouse’s tax: Capped at 50% of share = JPY 78.5 million
• Children’s share (25% each): JPY 113 million each, taxed at their respective rates

Cross-Border Coordination and Double Taxation Relief

Hong Kong does not impose an inheritance tax, but the UK, US, and Japan do. For a Hong Kong resident with assets in all three jurisdictions, double taxation can arise. The UK has double taxation treaties with the US (1979) and Japan (1970), but no treaty with Hong Kong. The US has a treaty with Japan (2004). Where no treaty exists, unilateral relief is available under the domestic law of each country.

• UK unilateral relief: Under IHTA 1984, s. 159, the UK allows a credit for foreign IHT paid on assets that are also subject to UK IHT, capped at the UK IHT attributable to those assets.
• US foreign tax credit: Under IRC §2014, the US allows a credit for foreign death taxes paid on assets included in the US gross estate, limited to the US estate tax attributable to those assets.
• Japan foreign tax credit: Under Article 76 of the Inheritance Tax Act, Japan allows a credit for foreign inheritance tax paid on foreign-situated assets, capped at the Japanese tax attributable to those assets.

Actionable Takeaways

1. For UK exposure, review residence history immediately: any individual UK-resident for 10 of the past 20 tax years is now deemed domiciled, triggering worldwide IHT at 40% above the £325,000 NRB.
2. For US assets held by non-residents, the US$60,000 NRNC exemption is de minimis — restructure US property and equity holdings into a non-US corporation or trust to avoid inclusion in the US gross estate.
3. For Japan, the progressive rate of up to 55% on worldwide assets for residents with 10+ years of jusho makes life insurance (with the JPY 5 million per-heir deduction) a critical liquidity tool.
4. Apply BPR and APR in the UK before 6 April 2026, when the current 100% relief on unlisted trading company shares may face a cap under pending legislation.
5. In all three jurisdictions, a professionally drafted will executed in Hong Kong (with a Hong Kong probate grant) does not override the local succession laws of the situs country — separate local wills or trusts may be required for immovable property.