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November 17, 2021

How the Samsung family’s £7 billion inheritance tax bill is ringing alarm bells even beyond South Korea

By Arun Kakar

The £7 billion inheritance tax bill faced by the family behind Samsung has rung alarm bells even beyond South Korea, writes Arun Kakar

For the Lee dynasty, 2021 did not get off to a good start. Following the passing of Samsung chairman Lee Kun-hee at the end of 2020, and with the de facto head of the clan heading to prison, the family was faced with a record inheritance tax bill of 12 trillion Korean won – more than £7 billion.

In April, it was announced that the Lees would donate 23,000 artworks worth around £1.3 billion to South Korean museums in order to help foot one of the largest inheritance tax bills in history, which is ‘equivalent to three to four times the Korean government’s total estate tax revenue last year’, as the family made painfully clear in a statement.

South Korea’s inheritance tax rates are among the most stringent in the world. The state levies a tax of 50 per cent of the value of assets, which rises to 60 per cent for company shares – well above the 40 per cent rate in the US and UK. Not only is the rate higher, but the constraints are tougher, too.

Under Korean tax law, certain exemptions and reliefs are available to small and medium-sized firms, notes Kelly Greig, head of tax at Paris Smith. But clearly these do not apply to Samsung.

The system is more punitive still. ‘As well as the high [inheritance] tax rate, the family can only spread the cost of the tax over five years. Other nations have adopted a more generous approach of ten years of instalments for certain assets,’ Greig tells Spear’s. ‘This has seen the family have to borrow money at high interest rates in order to meet the liability.’

Adding another dimension to the affair was the fact that Kun-hee’s son and Samsung vice-chair Lee Jae-yong was in prison at the time of the family’s announcement, serving a two-and-a-half-year sentence for bribery, embezzlement and concealment. In January Jae-yong, who became de facto head of the conglomerate in 2014 after his father suffered a heart attack, was found by a court to have ‘actively provided bribes and implicitly asked the president to use her power to help his smooth succession’. In August he was released early.

The drama has shone a light on the ‘chaebols’, South Korean family-run conglomerates that also include the likes of Hyundai and SK Group. Owned, controlled and managed by family dynasties, chaebols emerged in the mid-20th century during President Park Chung-hee’s rapid industrialisation programme, which spurred South Korea’s development from a predominantly agrarian economy into one of the world’s leading manufacturers of cars, telecoms and electronics.

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More than 40 chaebols are active today, collectively representing around half of South Korea’s stock market. According to the Council of Foreign Relations, an American think tank, Chaebols enjoy a ‘symbiotic’ relationship to government, an aspect of their existence that was placed on full display during Lee Jae-yong’s trial.

The reputation of the chaebols is suffering in South Korea, where they are sometimes viewed as exemplars of unfair business practice and stifling of competition. President Moon Jae-in, who was re-elected comfortably last year, first took office in 2017 with a pledge to rein in the conglomerates, and last December he passed a bill to make it harder for the largest shareholders to appoint auditors and to increase scrutiny on dealings with affiliates.

Samsung, South Korea’s largest chaebol (it accounts for a stunning 20 per cent of the country’s economy), is also a touchpoint for the intersection between reputation and taxation issues faced by wealthy families outside South Korea.

‘In the Samsung case I am sure the family’s recent reputational concerns were a consideration in having a high-profile public display of philanthropy,’ says Marcus Parker, a tax partner at Harbottle & Lewis, who notes an ‘ever growing desire’ in wealthy families to be engaged in philanthropy: ‘Reputation management is a key part of estate planning, and the payment or otherwise of tax is now a crucial issue to consider when planning the affairs of wealthy families.’

The Samsung affair arrives at a pivotal moment. In May, the OECD argued that inheritance taxes could be ‘an important instrument to address inequality’ in the current context of new, coronavirus-induced pressures faced by public finances. And a global minimum corporation tax has already been agreed by G7 governments.

‘If people can do that with corporation tax, governments might look at the receipts generated and might ask if it’s possible to do something similar with inheritance tax,’ says Jonathan Riley, head of private wealth at Fladgate. ‘It must be interesting to governments to realise that a receipt of £7 billion can make a massive difference.’

Image: Jamie Coe

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