Estate tax in the Philippines: Rates, exclusions and deductions

Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.

The current estate tax rates in the Philippines range from 5% to 20% of the net estate. This is more specifically outlined in the table below:

THE ESTATE TAX OF EXCESS SHALL BE PLUS OVER Exempt Below P200,000 5% P200,000 P15,000 8% 500,000 135,000 11% 2,000,000 465,000 15% 5,000,000 1,215,000 20% 10,000,000

1.   What are included in gross estate?

·          For resident alien decedents/citizens:

a)   Real or immovable property, wherever located

b)   Tangible personal property, wherever located

c)   Intangible personal property, wherever located

·         For non-resident decedent/non-citizens:

a)   Real or immovable property located in the Philippines

b)   Tangible personal property located in the Philippines

c)   Intangible personal property - with a situs in the Philippines such as:

-  Franchise which must be exercised in the Philippines

-  Shares, obligations or bonds issued by corporations organized or constituted in the Philippines

-  Shares, obligations or bonds issued by a foreign corporation 85% of the business of which is located in the Philippines

-  Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines ( i.e., they are used in the furtherance of its business in the Philippines)

-  Shares, rights in any partnership, business or industry established in the Philippines

2.   What are excluded from gross estate?

·         GSIS proceeds/ benefits

·         Accruals from SSS

·         Proceeds of life insurance where the beneficiary is irrevocably appointed

·         Proceeds of life insurance under a group insurance taken by employer (not taken out upon his life)

·         War damage payments

·         Transfer by way of bona fide sales

·         Transfer of property to the National Government or to any of its political subdivisions

·         Separate property of the surviving spouse

·         Merger of usufruct in the owner of the naked title

·         Properties held in trust by the decedent

·         Acquisition and/or transfer expressly declared as not taxable

3.   What will be used as basis in the valuation of property?

·         The properties subject to Estate Tax shall be appraised based on its fair market value at the time of the decedent's death.

·         The appraised value of the real estate shall be whichever is higher of the fair market value, as determined by the Commissioner (zonal value) or the fair market value, as shown in the schedule of values fixed by the Provincial or City Assessor.

·         If there is no zonal value, the taxable base is the fair market value that appears in the latest tax declaration.

·         If there is an improvement, the value of improvement is the construction cost per building permit or the fair market value per latest tax declaration.

4.   What are the allowable deductions for Estate Tax purposes?

     For Resident Decedent

·          Expenses, losses, indebtedness and taxes

a)    Funeral Expenses

i)    CA 466 - 5 % of gross estate (up to Dec. 31, 1972)

ii)    PD 69 - 5 % of gross estate but not exceeding P 50,000 (Jan. 1, 1973 to July 27, 1992)

iii)   RA 7499 - 5 % of gross estate but not exceeding P 100,000 (July 28, 1992 to December 3l, 1997)

iv)   RA 8424 - 5% of gross estate but not exceeding P 200,000 (Jan. 1,1998)

b)   Judicial expenses of the testamentary/intestate proceedings

c)   Valid claims against the estate

d)   Claims against insolvent person

e)   Unpaid mortgages/indebtedness

f)    Unpaid taxes

g)   Casualty losses

h)   Property previously taxed or vanishing deductions

      Requisites:

·         Present decedent must have died within five (5) years from date of death of prior decedent or date of gift

·         The property with respect to which the deduction is claimed must have formed part of the gross estate situated in the Philippines of the prior decedent or taxable gift of the donor

·         The property must be identified as the same property received from prior decedent or donor or the one received in exchange therefore

·         The estate taxes on the transmission of the prior estate or the donors tax on the gift must have been finally determined and paid

·         No vanishing deduction on the property or the property given in exchange therefore was allowed to the prior estate

i)    Transfer for public purpose

j)    Share of surviving spouse

k)   Medical expenses - those incurred by the decedent within one (1) year prior to his/her death which shall be substantiated with receipts

l)    Family Home - fair market value but not to exceed P1,000,000.00

m)  Standard Deduction - an amount equivalent to P1,000,000.00 (applicable only for death occurring after the effectivity of RA 8424 which is January 1, 1998.)

n)  Amount received by the heirs under Republic Act No. 4917 (applicable only for death occurring after the effectivity of RA 8424 which is January 1, 1998)

      For Non-Resident Decedent, not a citizen of the Philippines

·         Expenses, losses, indebtedness, taxes

·         Property previously taxed

·         Transfer for public use

·         Share in the conjugal property

(Taken from the BIR website)