Introduction

In the Philippines, estate tax is a levy imposed by the government on the privilege of transferring the estate of a deceased person to their heirs or beneficiaries. This tax is governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act (RA) No. 10963, known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, effective January 1, 2018, and further modified by subsequent laws such as RA No. 11534, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. For land properties, which form a significant portion of many estates, the computation of estate tax involves specific valuation rules, inclusions in the gross estate, allowable deductions, and a flat tax rate applied to the net taxable estate.

This article provides a comprehensive overview of the estate tax computation methods applicable to land properties in the Philippine context. It covers the legal framework, valuation principles, components of the gross and net estate, deduction mechanisms, tax rates, filing requirements, penalties, and related administrative procedures. Understanding these elements is crucial for estate administrators, heirs, legal practitioners, and taxpayers to ensure compliance with the Bureau of Internal Revenue (BIR) regulations.

Legal Framework

The estate tax in the Philippines is rooted in Section 84 of the NIRC, which defines it as a tax on the right to transmit property at death. The tax applies to the worldwide estate of Filipino citizens and resident aliens, while non-resident aliens are taxed only on properties situated in the Philippines. Land properties, being immovable assets located within the country, are always included in the taxable estate regardless of the decedent's residency status.

Key amendments under the TRAIN Law simplified the estate tax structure by replacing the previous progressive rates (ranging from 5% to 20%) with a flat 6% rate on the net estate. This change aimed to reduce tax burdens and encourage timely settlements. Additionally, the law introduced a standard deduction of PHP 5 million, a family home deduction up to PHP 10 million, and other relief measures. The CREATE Act further refined certain provisions, but the core computation method for land properties remains unchanged.

Administrative guidelines are provided through BIR Revenue Regulations (RR), such as RR No. 12-2018, which details the implementation of the TRAIN Law's estate tax provisions, and RR No. 2-2003 on valuation of real properties. These regulations ensure uniformity in tax assessments and provide mechanisms for dispute resolution.

Valuation of Land Properties

Accurate valuation is the cornerstone of estate tax computation for land properties. Under Section 88(B) of the NIRC, the fair market value (FMV) of real property at the time of death is used for inclusion in the gross estate. For land properties, the FMV is determined as the higher of:

The zonal value established by the BIR Commissioner, based on the latest Schedule of Zonal Values (SZV) for the area where the property is located.
The assessed value as shown in the latest tax declaration issued by the local assessor's office.

Zonal values are periodically updated by the BIR through Revenue Memorandum Orders (RMOs) to reflect current market conditions. These values are classified by land use (e.g., residential, commercial, agricultural, industrial) and location (e.g., urban vs. rural areas). If the property spans multiple zones, a weighted average may be applied.

In cases where no zonal value exists (e.g., for newly developed areas), the BIR may rely on the assessed value or commission an independent appraisal. For agricultural lands, special considerations apply under RA No. 6657 (Comprehensive Agrarian Reform Law), where valuation may incorporate productivity factors, but for estate tax purposes, the standard FMV rule prevails.

Improvements on the land, such as buildings or structures, are valued separately. The FMV of improvements is based on the replacement cost less depreciation, or the assessed value, whichever is higher. If the land includes crops or timber, these are treated as separate assets under personal property valuation rules.

Challenges in valuation often arise from discrepancies between zonal and assessed values. Heirs may contest BIR assessments by submitting a sworn declaration of FMV supported by evidence, such as recent sales of comparable properties. If unresolved, appeals can be made to the Department of Justice or courts.

Inclusions in the Gross Estate

The gross estate includes all property, real or personal, tangible or intangible, owned by the decedent at the time of death. For land properties, inclusions encompass:

Exclusive Properties: Lands owned solely by the decedent, such as those acquired before marriage or through inheritance.
Conjugal or Community Properties: Under the Absolute Community of Property (ACP) or Conjugal Partnership of Gains (CPG) regimes (as per the Family Code), only the decedent's share (typically 50%) is included. For example, if a married couple owns a parcel of land valued at PHP 10 million under ACP, only PHP 5 million is part of the gross estate.
Transfers with Retained Interest: Lands transferred during the decedent's lifetime but where they retained possession, enjoyment, or income (e.g., via donation mortis causa) are included under Section 85(B) of the NIRC.
Revocable Transfers: Properties transferred revocably are fully included.
Properties Subject to Power of Appointment: If the decedent held a general power of appointment over land, its value is included.
Proceeds from Insurance: If land was insured and proceeds are receivable by the estate, they may be included if the decedent paid premiums.

For non-resident aliens, only Philippine-situs land is included, excluding foreign properties.

Allowable Deductions

Deductions reduce the gross estate to arrive at the net estate, mitigating the tax burden. Deductions specific or relevant to land properties include:

Ordinary Deductions:
- Funeral expenses: Up to 5% of the gross estate or PHP 200,000, whichever is lower.
- Judicial expenses: Costs for estate settlement, including legal fees for land title transfers.
- Claims against the estate: Valid debts, including real property taxes arrears on land.
- Unpaid mortgages or liens: Deductible if the full FMV of the land was included in the gross estate.
- Losses: Casualty losses to land (e.g., from natural disasters) not compensated by insurance, incurred post-death but before filing.
Special Deductions:
- Standard deduction: PHP 5 million, applicable to the entire estate.
- Family home deduction: Up to PHP 10 million for the decedent's dwelling, including the land on which it stands (not exceeding one hectare for urban areas). The land must be certified as the family home and occupied by the family.
- Medical expenses: Up to PHP 500,000 incurred within one year before death.
- Vanishing deduction: Applies to land received by the decedent via inheritance or donation within five years before death, on which donor's or estate tax was paid. The deduction is phased out: 100% if within one year, 80% for 1-2 years, and so on, down to 20% for 4-5 years.

For married decedents, deductions are allocated between conjugal and exclusive properties. Non-resident aliens are limited to pro-rated deductions based on the Philippine gross estate's proportion to the worldwide estate.

Computation of Estate Tax

The estate tax is computed as follows:

Calculate Gross Estate: Sum the FMV of all assets, including land at the higher of zonal or assessed value.
Subtract Deductions: Deduct allowable ordinary and special deductions to get the net estate.
Apply Tax Rate: Estate tax = 6% × Net Estate.
Subtract Credits: Deduct any estate tax paid to foreign countries on foreign properties (for residents) or prior transfer taxes.

Example (hypothetical for illustration): A decedent owns land valued at PHP 15 million (zonal value higher than assessed). Gross estate totals PHP 20 million (including other assets). After PHP 5 million standard deduction, PHP 10 million family home deduction (applicable to the land), and PHP 1 million other deductions, net estate is PHP 4 million. Estate tax = 6% × PHP 4 million = PHP 240,000.

If the net estate is zero or negative, no tax is due.

Filing and Payment Requirements

The estate tax return (BIR Form 1801) must be filed within one year from death, extendable up to 30 days. Filing is done electronically via the BIR's eBIRForms or at the Revenue District Office (RDO) where the decedent resided. For land properties, supporting documents include death certificate, land titles (Original Certificate of Title or Transfer Certificate of Title), tax declarations, zonal value certifications, and appraisal reports if contested.

Payment is due upon filing, but installment options are available for up to two years if the estate lacks liquidity, subject to interest. For estates exceeding PHP 2 million, a Certified Public Accountant (CPA) must certify the return.

If land is distributed before tax payment, extrajudicial settlements require prior tax clearance. The BIR issues an Electronic Certificate Authorizing Registration (eCAR) for title transfers.

Penalties and Remedies

Non-compliance incurs penalties: 25% surcharge for late filing/payment, plus 12% interest per annum. Willful neglect attracts 50% surcharge and potential criminal liability under Section 255 of the NIRC.

Heirs may seek compromise settlements for deficiencies or request abatements for reasonable causes. Appeals against assessments go to the BIR Commissioner, then the Court of Tax Appeals (CTA), and ultimately the Supreme Court.

Administrative and Practical Considerations

Estate administrators must inventory land properties promptly to avoid undervaluation penalties. Engaging professionals like lawyers, appraisers, and accountants is advisable for complex estates involving multiple lands or disputes.

In agrarian reform contexts, lands under Certificates of Land Ownership Award (CLOA) may have restrictions on transfer, affecting estate distribution but not tax computation. For ancestral lands of indigenous peoples, exemptions or special rules under RA No. 8371 (Indigenous Peoples' Rights Act) may apply, but FMV inclusion remains.

Tax planning strategies, such as inter-vivos donations (subject to donor's tax at 6%), can reduce estate tax on land by removing assets from the gross estate, provided not deemed mortis causa.

Conclusion

The computation of estate tax for land properties in the Philippines emphasizes fair valuation, equitable deductions, and a simplified flat rate to facilitate inheritance. Compliance ensures smooth property transfers and avoids legal complications. Taxpayers should consult updated BIR issuances for any recent changes, as tax laws evolve to address economic needs.