Estate Tax in the Philippines
What is Estate Tax in the Philippines?
When a loved one dies, his or her assets are given to lawful heirs or beneficiaries. However, this process requires paying for tax called estate tax. Estate is everything that comprises a person’s net worth by the time of death. This includes properties, personal possessions, financial securities, and other assets that the person had control over before passing away.
Estate tax in the Philippines refers to the tax on the right of the deceased person to transfer their assets to lawful heirs or beneficiaries. According to the Bureau of Internal Revenue or BIR, estate tax is not property tax but is imposed on transferring assets when the owner dies.
For example, when a loved one dies, their estate pays tax for the process of transferring their assets—real, personal, tangible, or intangible, to their heirs and other beneficiaries.
Estate Tax vs Inheritance Tax
If you inherited an asset after a loved one dies, you need to pay an inheritance tax. It’s a tax imposed on the heir or beneficiary receiving any asset from a deceased person. In the Philippines, inheritance tax is the same as estate tax. You don’t have to pay for separate taxes when assets are transferred, you only need to settle the fees for the estate tax.
How Much is Estate Tax in the Philippines?
Any estate with a gross value of more than PHP 200,000 must pay for an estate tax According to the Tax Reform for Acceleration and Inclusion or TRAIN Law. Estate tax in the Philippines is 6% of the net estate.
To get the net estate, simply subtract all allowable deductions from the gross estate or the value of the deceased’s properties. Then, multiple the net estate to 0.06 to get the cost of the estate tax.
For example, the gross estate totals PHP 5M and deductions total PHP 1.5M. The net estate is then PHP 3.5M. By multiplying the net estate of PHP 3M to 0.06, you get PHP 180,000, which is the cost of the estate tax
General Requirements for Estate Tax Return
Estate Tax Return Form (BIR Form 1801)
Certified true copy of Death Certificate
Taxpayer Identification Number (TIN) of the deceased and their heir
Affidavit of Self Adjudication, Deed of Extra-Judicial Settlement of Estate, Court Order, or Sworn Declaration of All Properties of the Estate
Certified copy of the schedule of partition and the order of the court approving the same within thirty (30) days after the promulgation of such order, in case of judicial settlement
Proof of Claimed Tax Credit (if applicable)
Certified Public Accountant (CPA) Statement on the itemized assets of the deceased
Certification of the Barangay Captain for the claimed Family Home
Duly Notarized Promissory Note for “Claims Against the Estate” arising from Contract of Loan
Proof of the claimed Property Previously Taxed
Proof of the claimed Transfer for Public Use
Copy of Tax Debit Memo used as payment (if applicable)
How to File for Estate Tax Return
The executor of the estate must fill for Estate Tax Return (BIR Form 1801) within one year of the deceased’s death. However, the BIR Commissioner can grant an extension of filing of up to 30 days. The estate will also be assigned its own Tax Identification Number (TIN).
If you are the executor , you need to file the estate tax return with an Authorized Agent Bank (AAB) at the Revenue District Office (RDO) that has jurisdiction over the deceased’s place of residence when they died.
However, if the deceased has no legal residence in the country, you must file the estate tax return with the Office of the Commissioner at RDO No. 39, South Quezon City. You can also file the return an AAB located at the RDO where you live if the heirs or beneficiaries are not residents of the Philippines.
Estate Tax Amnesty
In February 2019, President Duterte approved RA 11213 or the Tax Amnesty Act of 2019. This act gives taxpayers an opportunity to settle their outstanding tax obligations without any penalties. The law covers estate tax amnesty, giving executors and heirs to settle their outstanding estate taxes. The amnesty covers estates of decedents who die on or before December 31, 2017, whose estate taxes are still unpaid as of December 31, 2017.
When is the Deadline for Estate Tax Amnesty?
As of writing the deadline for estate tax amnesty is December 31, 2020. However, the House of Representatives recently approved a bill seeking to extend tax amnesty until December 31, 2022. It aims to provide economic relief to taxpayers unable to deal with their taxes due to the pandemic.
How Can I Avoid Estate Tax in the Philippines?
You can’t completely avoid paying for estate tax in the Philippines but you can minimize the amount your heirs or beneficiaries have to pay in the future. Here are some steps to consider:
1. Sell your assets
You can sell your assets during your lifetime to your intended heirs or beneficiaries. You will still have to pay for taxes, but it’s lower compared to estate taxes.
For instance, if you sell a property when you’re still alive, the sale will be subject to a 6% capital gains tax and other taxes. These may seem a lot, but the taxes are only imposed on the asset you’re selling.
However, make sure that your heirs can buy the assets. The assets should also be in line with current market values. You also have to ensure that you’re not doing a simulated sale or transferring an asset to look like a contract of sale is a donation. This is illegal and will only result in tax issues.
2. Turnover to your heirs
You can also turn over your assets to your beneficiaries while you’re still living. You will then have fewer assets in your name, reducing the cost of the estate tax. However, you will have to pay for donor’s tax based on the total net gifts you made during a calendar year. The rate is generally 2% to 15% of the net gifts’ value.
3. Get insurance
Consider getting life insurance and make your heirs your beneficiaries of the policy. Your assets will then be passed on to them when you pass. They can use the policy’s proceeds to pay for the estate tax. When you die, your insurance’s proceeds are transferred to your beneficiaries in full. These are also exempted from estate tax if the beneficiaries are assigned as irrevocable.
Everyone wants to leave a legacy, but it’s also important how leaving such a legacy can financially affect your loved ones. Knowing about estate tax in the Philippines can help you plan for your estate and the inevitable, making sure that your loved ones are taken care of even when you’re gone.