Introduction

In the Philippines, estate tax serves as a levy imposed by the government on the privilege of transmitting property upon the death of an individual. This tax is not on the property itself but on the right to transfer it to heirs or beneficiaries. Inherited property, which forms part of the decedent's estate, is subject to this tax before it can be legally transferred to the heirs. The computation of estate tax is a critical process that ensures compliance with Philippine tax laws, preventing delays in property distribution and potential penalties. This article provides a comprehensive overview of the estate tax framework, focusing on its application to inherited property, including valuation, deductions, tax rates, and procedural requirements.

Legal Basis

The primary legal foundation for estate tax in the Philippines is found in the National Internal Revenue Code of 1997 (NIRC), as amended by Republic Act No. 10963, known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on January 1, 2018. Prior to TRAIN, estate tax rates were progressive, ranging from 5% to 20% depending on the net estate value. The TRAIN Law simplified this by introducing a flat 6% rate while expanding deductions to ease the burden on families. Additional amendments under Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act of 2021, did not significantly alter the estate tax provisions for individuals but reinforced administrative procedures. Revenue Regulations (RR) issued by the Bureau of Internal Revenue (BIR), such as RR No. 12-2018 and subsequent issuances, provide detailed guidelines on computation and compliance.

Estate tax applies to the worldwide estate of Filipino citizens and resident aliens, including properties located abroad. For non-resident aliens, only properties situated in the Philippines are taxable. Inherited property typically includes real estate, personal property, shares of stock, bank deposits, and other assets owned by the decedent at the time of death.

Who is Liable for Estate Tax?

The estate tax is the liability of the estate itself, but in practice, it is paid by the executor, administrator, or heirs before the property can be distributed. Under Section 91 of the NIRC, the tax must be settled to obtain a Certificate Authorizing Registration (CAR) from the BIR, which is necessary for transferring titles with the Registry of Deeds or other government agencies. Heirs are jointly and severally liable for the tax, meaning any heir can be held responsible for the full amount if others fail to contribute. In cases of extrajudicial settlement (common for smaller estates without disputes), the heirs collectively handle the filing. For judicial settlements, the court-appointed administrator oversees the process.

Components of the Gross Estate

The starting point for estate tax computation is determining the gross estate, which includes all property owned by the decedent at the time of death, valued at fair market value (FMV). For inherited property, this encompasses:

Real Property: Land, buildings, and improvements. Valued based on the higher of the zonal value (as determined by the BIR) or the assessed value (from the local assessor's office). For example, if a decedent owns a residential lot in Metro Manila with a zonal value of PHP 10,000 per square meter and an assessed value of PHP 8,000, the zonal value prevails.
Personal Property: Vehicles, jewelry, furniture, and artworks. Valued at FMV, often requiring appraisals from accredited professionals.
Financial Assets: Bank accounts, investments, stocks, bonds, and receivables. Stocks listed on the Philippine Stock Exchange are valued at the mean between the highest and lowest quotation on the date of death or the nearest trading day.
Intangible Assets: Intellectual property, goodwill, and business interests.
Conjugal vs. Exclusive Property: Under the Family Code, properties acquired during marriage are generally conjugal (shared equally between spouses), while those acquired before marriage or through inheritance/donation are exclusive. For estate tax purposes, the gross estate includes the decedent's share in conjugal property (50%) plus all exclusive property. If the decedent was married under absolute community of property, all assets are communal unless proven otherwise.
Inclusions for Special Cases: Proceeds from life insurance (if the decedent is the insured and beneficiary is the estate or revocable), transfers in contemplation of death, and properties under powers of appointment.

Exclusions include properties already taxed (e.g., via donor's tax) or non-taxable items like GSIS/SSS benefits.

Allowable Deductions

Deductions reduce the gross estate to arrive at the net taxable estate. The TRAIN Law liberalized these to provide relief:

Ordinary Deductions:
- Funeral expenses: Up to 5% of the gross estate or PHP 200,000, whichever is lower, supported by receipts.
- Judicial expenses: Costs of estate administration, such as attorney's fees and court fees.
- Claims against the estate: Valid debts of the decedent, including loans and unpaid taxes, with proof like promissory notes.
- Claims against insolvent persons: If included in gross estate.
- Unpaid mortgages or losses: Deductible if incurred during settlement.
- Vanishing deduction: For properties previously taxed within five years (e.g., inherited from a prior decedent), with rates decreasing over time (100% if within one year, down to 20% after four years).
Special Deductions:
- Standard deduction: PHP 5 million, automatically applied without need for substantiation.
- Family home: Up to PHP 10 million, if certified as such and occupied by the family.
- Medical expenses: Up to PHP 500,000 incurred within one year before death, with receipts.
- Benefits for government employees: Amounts received under RA 4917 (retirement benefits).

For non-resident aliens, deductions are prorated based on Philippine-situs properties.

Computation of Net Estate and Tax Due

The formula is straightforward:

Net Estate = Gross Estate - Deductions

If the net estate is zero or negative, no tax is due. Otherwise, apply the flat 6% rate:

Estate Tax = Net Estate × 6%

Example: Suppose a decedent's gross estate is PHP 20 million (including inherited real property valued at PHP 15 million). Deductions total PHP 8 million (PHP 5 million standard + PHP 2 million family home + PHP 1 million funeral/judicial). Net estate = PHP 12 million. Tax due = PHP 12 million × 6% = PHP 720,000.

For married decedents, compute the conjugal share first, deduct conjugal deductions, then add exclusive property and deduct exclusive deductions.

Valuation of Inherited Property

Inherited property is valued at FMV as of the decedent's death, not acquisition cost. For real property, BIR Revenue District Offices provide zonal values, updated periodically. If no zonal value exists, use the latest tax declaration. Appraisals may be required for unique properties. Fluctuations in market value post-death do not affect computation; the death date locks the value. Heirs must secure a Tax Clearance Certificate for movable property and an Electronic Certificate Authorizing Registration (eCAR) for immovable property.

Filing and Payment Procedures

Timeline: The estate tax return (BIR Form 1801) must be filed within one year from death. Extensions up to 30 days may be granted for cause.
Where to File: With the Revenue District Office (RDO) where the decedent resided, or if non-resident, RDO 39 (South Quezon City).
Requirements: Sworn declaration of gross estate, death certificate, inventory of properties, deeds/titles, appraisals, receipts for deductions, and CPA-certified statements for estates over PHP 2 million.
Payment: Via authorized banks, BIR offices, or online. Installment payments are allowed if the estate lacks liquidity, up to two years with interest.
Amnesty and Relief: Periodic estate tax amnesties (e.g., under RR 6-2019, extended to 2023) allow settlement of past deficiencies without penalties. As of 2026, check for ongoing programs.

Penalties for Non-Compliance

Late filing incurs a 25% surcharge (50% if fraudulent), plus 12% annual interest and compromise penalties. Failure to pay can lead to liens on properties, preventing transfers. Criminal charges apply for willful evasion.

Extrajudicial vs. Judicial Settlement

For undisputed estates under PHP 10 million, extrajudicial settlement via a Deed of Extrajudicial Settlement (published in a newspaper) suffices, followed by estate tax payment. Larger or contested estates require judicial probate. In both, estate tax must be settled first.

Related Taxes on Inherited Property

While estate tax covers the transfer at death, subsequent sales by heirs may trigger:

Capital Gains Tax (6% on gain from sale of real property).
Documentary Stamp Tax (1.5% on FMV).
Donor's Tax if property is redistributed among heirs unevenly.

No income tax on inheritance itself, as it is not considered income.

Planning and Mitigation Strategies

To minimize estate tax, decedents can use lifetime transfers (subject to donor's tax at 6%), trusts, or insurance policies designating irrevocable beneficiaries. Families should maintain updated records and consult tax professionals early.

Conclusion

Estate tax computation for inherited property in the Philippines balances fiscal revenue with family protection through simplified rates and generous deductions. Compliance ensures smooth property transfer, avoiding legal hurdles. Heirs should engage certified public accountants or lawyers specializing in taxation for accurate computations, as errors can result in audits or disputes with the BIR. This framework promotes equitable wealth distribution while funding public services.