Estate Tax Implications for Inheritance by Representation in the Philippines

I. Introduction

Inheritance by representation (or derecho de representación) is one of the most important mechanisms in Philippine succession law. It prevents the complete exclusion of a branch of the family when an heir predeceases the decedent or is disqualified from inheriting. The representative “steps into the shoes” of the person represented and receives exactly the share that the latter would have received had he or she been alive or qualified.

Because the representative is almost always more remote in degree (typically grandchildren, great-grandchildren, or nephews/nieces) than direct heirs, the question naturally arises: does the Philippine estate tax regime treat property passing by representation differently from property passing directly to children or other closer heirs?

The short answer under the present law is no. The estate tax is a tax on the privilege of the decedent to transmit property at death, not on the privilege of the heir to receive it. The rate is now a flat 6 % on the net taxable estate regardless of the relationship or degree of the recipient. Consequently, inheritance by representation has no material estate tax consequence under the law applicable to decedents dying on or after 1 January 2018.

Nevertheless, a complete understanding of the subject requires a detailed examination of both the succession rules on representation and the current estate tax regime.

II. Inheritance by Representation under Philippine Law

The rules are found in Articles 970–982 of the Civil Code.

Key Principles

1. Representation is a fiction of law by which the representative is raised to the place, degree, and rights of the person represented (Art. 970).

2. The representative is called to succeed by law, not by the person represented. The inheritance passes directly from the decedent to the representative (Art. 971). This is crucial: there is no intermediate succession through the predeceased heir.

3. Representation operates in two principal scenarios:

   • In the direct descending legitimate line without limit of degree (grandchildren, great-grandchildren, etc.).
   • In the collateral line only in favor of children of brothers or sisters (nephews and nieces) who concur with at least one uncle or aunt (Art. 972, par. 2).

4. Representation applies both in intestate succession and in the legitime portion of testate succession (Arts. 974–982, 886, 892, 895).

5. It takes place in cases of:

   • Predecease
   • Incapacity (unworthiness, disinheritance without successful impugnation of the disinheritance, legal incapacity)
   • Repudiation (Art. 977)

6. Division is always per stirpes in the branch that is represented. If several representatives take the place of one person, they divide the share per capita among themselves (Art. 974, par. 2).

Practical Effect

A grandchild who inherits by representation receives exactly the share his or her deceased parent would have received. The grandchild is treated, for purposes of quantity of inheritance, as if he or she were a child of the decedent.

III. Estate Tax Regime Applicable to Deaths on or after 1 January 2018 (TRAIN Law and subsequent amendments)

Republic Act No. 10963 (TRAIN Law), effective 1 January 2018, radically simplified estate taxation:

• Single flat rate of 6 % over the net taxable estate (Sec. 84, NIRC as amended).
• No more classification of heirs into Class A, B, C, etc.
• No more graduated rates from 5 %–20 %.
• No more ₱200,000 exemption for spouse/descendants/ascendants and ₱50,000/₱20,000 exemptions for other relatives.
• Standard deduction of ₱5,000,000.
• Family home allowance of up to ₱10,000,000.
• Medical expenses incurred within one year prior to death, up to ₱500,000 (supported by receipts).
• Other ordinary deductions (debts, losses, transfers for public use, vanishing deduction, etc.).
• No estate tax if the net taxable estate does not exceed the available deductions.

The law that applies is the law in force at the time of death (Sec. 3, Revenue Regulations No. 12-2018).

As of December 2025, no legislation has changed the 6 % flat rate or reintroduced relationship-based exemptions or graduated rates.

IV. Specific Estate Tax Implications (or Lack Thereof) of Inheritance by Representation

Because the estate tax is now completely neutral with respect to the relationship between decedent and heir, the following conclusions apply:

1. No difference in tax rate.
   Whether the recipient is a child (direct heir) or a great-great-grandchild (representing through several predeceased generations), the tax is exactly the same 6 % on the net taxable estate.

2. No difference in exemptions or deductions.
   All heirs, whether direct or by representation, benefit indirectly from the same ₱5M standard deduction, ₱10M family home allowance, etc. These deductions reduce the taxable estate before any distribution.

3. The “step-into-the-shoes” fiction does not affect tax computation.
   Although the representative is treated as having the same share quantity and succession rights as the person represented, the Bureau of Internal Revenue has never interpreted this fiction as changing the actual blood relationship for tax purposes. In any event, such interpretation is now irrelevant because the rate is flat.

4. No double estate taxation.
   Since the representative succeeds directly from the decedent (Art. 971), there is no intermediate inheritance from the predeceased parent. The property never formed part of the predeceased parent’s estate, so no prior estate tax was paid on it (except to the extent it may qualify for vanishing deduction if previously taxed within five years).

5. Joint and several liability of heirs for unpaid estate tax remains the same.
   Under Sec. 95 of the NIRC, heirs are liable only to the extent of the value of their respective shares. A representative heir is therefore liable pro rata in the same way as any other heir.

6. Capital gains tax on subsequent sale.
   The basis of inherited property is the fair market value at the time of the decedent’s death (Sec. 40(C)(5), NIRC for income tax purposes; also relevant for donor’s tax if later donated). This stepped-up basis applies equally whether the heir inherited directly or by representation.

V. Comparison with the Pre-TRAIN Regime (for historical context only)

Before 1 January 2018, the implications were more significant:

• Direct descendants and spouse enjoyed a ₱200,000 exemption and lower progressive rates (5 %–15 % or 20 %).
• Nephews/nieces inheriting by representation from an uncle/aunt were classified as “relatives in the collateral line” and suffered higher rates (up to 30 % in some brackets) with only ₱20,000 exemption.
• The BIR consistently ruled that the classification followed the actual relationship of the heir who actually received the property, not the person represented (BIR Ruling No. 47-84, among others). Thus, a nephew inheriting by representation paid the higher collateral rate even though he stepped into the shoes of his parent (brother/sister of decedent).

The TRAIN Law completely eliminated this distinction.

VI. Practical Recommendations for Estates Involving Representation

1. Always compute the legitime on a per stirpes basis first, then deduct estate tax from the free portion as much as possible to preserve compulsory heirs’ shares.

2. In large estates with multiple generations predeceased, consider executing a judicial or extrajudicial settlement that explicitly shows the per stirpes division to avoid BIR queries.

3. If the estate includes property previously taxed in another estate within five years (vanishing deduction under Sec. 86(A)(5)), the deduction is claimed at estate level and benefits all heirs proportionally, regardless of representation.

4. File Estate Tax Return (BIR Form 1801) within one (1) year from death. Payment may be extended in meritorious cases, but interest runs.

VII. Conclusion

Under the present Philippine estate tax regime, inheritance by representation has no adverse (and no beneficial) tax consequence. The flat 6 % rate and the elimination of relationship-based exemptions have rendered the mechanism completely tax-neutral. The representative receives the same share the predeceased heir would have received, and the estate pays exactly the same tax as it would have paid had the intermediate heir survived.

This neutrality is one of the unsung simplifications introduced by the TRAIN Law and remains in full force and effect as of December 2025.