Philippine Estate Taxes 2018

Wondering how Philippine Estate Taxes will impact your inheritance?

This post answers those questions as I explain the current 2018 Philippine TRAIN estate taxes and provide sample computations.

Contents

Estate Tax Introduction

What is a gross estate and how is it valued?

Allowable Deductions for Citizens

Allowable Deductions for Non Resident Aliens

Computation Unmarried Decedent, 30M Family Home

Computation Married Decedent, 30M Family Home

 

Estate Tax Introduction

Under the 2018 TRAIN law, taxes are now 6% on an estate’s net proceeds.

Simply computed, this is:

Gross estate less Allowable Deductions equals

Net Proceeds multiplied by 6%

Seems simple, but the confusion lies in what makes up the gross estate and the allowable deductions.

Add in foreign holdings, dual citizenships, and foreigners and most people are ready to thrown in the towel.

While we don’t go into complicated estate tax issues here – and trust me, every case is different – I try to provide enough information to point you in the right direction.

What is a gross estate and how is it valued?

All property of citizens and residents constitute the gross estate.

For non-resident aliens however, gross estate are properties only located in the Philippines and include intangible personal property subject to the rule of reciprocity.

Now, here comes the hard part – how do you value the gross estate

Land

Higher of the Fair Market Value given by the Commissioner or the provincial and city assessors.

Stock

As per the stock exchange but if not listed then it is the book value for unlisted common shares and the par value for unlisted preferred shares.

Club membership

Most recent bid price near date of death published in a newspaper.

So, now we have half the puzzle.

Allowable Deductions for Citizens

The missing half is what allowable deductions are.

The definition of these items are a bit more involved and need to be supported by substantial documentation.

Below is a simple summary of the allowed deductions.

There are some restrictions around some of the deductions and the details are best discussed with your lawyer.

  • Standard deduction of Php 5,000,000
  • Claims against the estate
  • Claims the estate might have against insolvent persons
  • Unpaid mortgages, taxes or casualty losses not covered by insurance or already claimed in an income tax filing
  • Previously taxed inherited property has exceptions at graduated rates if the previous decedent died within 5 years from the decedent in question. Other considerations are also applied.
  • Transfers to the Philippine Government for public use
  • Value of family home in excess of Php 10,000,000 will be taxed
  • Amount received by the heirs from the employer under R.A. 4917 Act Dealing with Retirement Benefits provided that the separation benefit is included as part of the gross estate.
  • Net share of the surviving spouse

Allowable Deductions for Non Resident Aliens

While the same rules for each deduction apply, not all deductions can be used by non-resident aliens.

It’s a shorter list.

  • Standard deduction of Php 500,000
  • Proportion of indebtedness his Philippine Gross Estate bears in relation to his entire Estate for
    • Claims against the estate
    • Claims the estate might have against insolvent persons
    • Unpaid mortgages, taxes or casualty losses not covered by insurance or already claimed in an income tax filing
  • Previously taxed inherited property has exceptions at graduated rates if the previous decedent died within 5 years from the decedent in question. Other considerations are also applied.
  • Transfers to the Philippine Government for public use
  • Net share of the surviving spouse

So that’s what the law says.

Remember that these are subject to considerations and you’ll have to work out with your accountant and lawyer.

Unmarried Decedent, 30M Family Home

This is a fairly simple scenario.

Say your unmarried Filipino uncle has a family home of 30M and other property worth 14M.

He has some unpaid real estate taxes of 2M.

 

44M Gross Estate

30M   Family Home

14M   Real & Personal Property

17M Allowable Deductions

5M      Standard Deduction

10M   Family Home Deduction

2M      Unpaid Real Estate Taxes

Net Estate is 27M

 

Simple so far.

Just remember that the 10M deduction is only used when for a family home and when that home is 10M and above.

If the family home is less than 10M of there is no family home, then the 10M cannot be used.

Married Decedent, 30M Family Home

Say we have the exact same scenario in terms of property and cost as above.

The only difference between this and the above scenario is that there is a surviving spouse.

Based on the law, we need to reduce the estate by the surviving spouse’s portion.

So, below is how we calculate her portion.

 

Surviving Spouse share:

44M Gross Estate

30M   Family Home

14M   Real & Personal Property

2M Deductions to Conjugal Property

2M      Unpaid Real Estate Taxes

42M Net Conjugal Estate

21M Surviving Spouse’s Share (1/2)

 

Estate tax is now calculated as

44M Gross Estate

30M   Family Home

14M   Real & Personal Property

38M Allowable Deductions

5M      Standard Deduction

10M   Family Home Deduction

2M      Unpaid Real Estate Taxes

21M Surviving Spouse’s Share

6M Net Estate

 

This works when the estate is composed of conjugal property.

If there are exclusive properties, then these have to be excluded from the surviving spouse’s calculation.

Exclusive properties are enumerated by the law and depend on what type of property regime governed at the time of your marriage.

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