Q&A: Is there a difference between estate tax and inheritance tax?

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Taxes are unavoidable. Even when you’re gone, your loved ones may still need to settle taxes on the valuable assets you left for them.  Find out about estate tax and inheritance tax and their differences, if there are any.

Many are working hard to ensure that they will not only be able to provide for their loved ones in the present but also when the inevitable comes. We want to leave a legacy – be it a piece of jewelry, property or money  – as our way to show them our love. Yet only a few know the inconvenience we can possibly cause our heirs due to taxes they need to pay before they can claim their inheritance.

What is an inheritance tax?

Those who have inherited a property or money after their loved ones die via a will or the law of succession may be required to pay an inheritance tax. It’s a government-imposed tax that the beneficiary or someone who receives the assets needs to pay.  In other countries, this type of tax is the sole responsibility of the beneficiary while the estate tax is paid out of the estate’s funds. In the Philippines, however, they are the same thing. 

You must understand that this is not a tax imposed on assets, but a duty on the transferring of the deceased’s estate to his or her beneficiaries. If several people are sharing for a particular property, inheritance or estate tax will be computed individually for every beneficiary. Every beneficiary is therefore responsible for settling his or her own tax.

An executor needs to file an estate tax return if the estate is comprised of registered stock shares, vehicles, property, or anything requiring clearance from the Bureau of Internal Revenue (BIR). 

How is an estate tax computed?

The tax is computed against the total value of the assets concerned and must be settled before distributing them to the beneficiaries.  In the Philippines, a graduated tax rate determines estate taxes. Estates with a net value below Php 200,000 are exempted while those valued more than the amount may incur a 5% to 20% tax rate.

If you have a Php 100-million estate, your beneficiaries may need to pay up to Php 20 million in taxes.  What more, they need to settle this within six months after your date of passing or they may face penalties.

What is the Estate Tax Amnesty?

The Tax Amnesty Act provided a 2-year period to taxpayers in settling estate tax obligations through a tax relief over properties with outstanding tax estate liabilities. It started on June 15, 2019, and will cover the unpaid estate taxes of any decedent who passed away on or before December 31, 2017. 

Those with unsettled estate taxes starting from January 2018 until recently can still benefit from the Estate Tax Amnesty through the amendments made under the TRAIN law. It states that a tax rate of 6% will be imposed on the total net estate value of the decedent. 

How can you use estate planning?

There are three ways to protect your legacy from inheritance tax and make sure that a sizable portion goes to your loved ones. This is called estate planning.

  • Get a life insurance policy

Getting insured will make your intended recipients irrevocable beneficiaries.  Since the insurance proceeds are transferable in full and free from the estate tax, it can be the inheritance itself or your beneficiary can use it to settle the duty on your assets. The proceeds are also income tax-free. 

  • Turnover your assets while still alive 

Transferring your properties to your heirs during your lifetime will get you fewer assets under your name but will imply lower inheritance tax. Note though that you may be subject to a donor’s tax for the transfer of the property as a gift. A graduated tax rate between 2-15% would apply to the total net gifts made for the entire calendar year. A 30% tax rate would apply to gifts given to strangers.

  • Sell your assets to your heirs 

If you want to pay lower taxes, selling the property to your heirs can be one of your options. When you sell the property, it will be subject to the documentary stamps tax, the transfer tax, and the capital gain tax. 

The tax charged on instruments, documents, loan agreements, sales, transfer of property, and other pertinent papers is called documentary stamps tax. It will reflect on the Deed of Absolute Sale with a tax rate of 1.5% for every Php1,000 worth of the zonal value, the selling price, or the fair market value, whichever of them is higher.  

The transfer tax is the tax charged for the transfer of ownership of real estate property. The rate ranges between 0.5%-0.75% of the property’s selling price or zonal value. This will, once again, depend on whichever of the two is higher according to the municipality where the property is located. 

A capital gains tax is charged for a property sold higher than the price when you first bought it. This will be the earnings gained by selling a capital asset. Its rate is 6% of the fair market value as stated by the BIR and will still be evaluated for adjustments. 

So that’s it. An inheritance tax is being used interchangeably with estate tax in the Philippines. Understanding it is crucial in estate planning.

 

While a great deal of effort and research was put into the creation of this article, Lamudi always advises property owners to consult with professionals, such as licensed real estate brokers and attorneys, when producing a will, donating a property, or in any other real estate transaction.

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