This legal guide outlines the current framework for computing and filing Estate Tax in the Philippines, primarily governed by the National Internal Revenue Code (NIRC) of 1997, as significantly amended by Republic Act No. 10963, otherwise known as the TRAIN Law.
1. Definition and Nature of Estate Tax
Estate tax is not a tax on property itself, but rather an excise tax on the privilege of the decedent to transmit their estate to lawful heirs and beneficiaries at the time of death. It accrues as of the moment of death, regardless of when the actual transfer of possession occurs.
2. Determining the Gross Estate
The "Gross Estate" includes all property, real or personal, tangible or intangible, wherever situated (for citizens and resident aliens). For non-resident aliens, only property situated within the Philippines is included.
Composition of Gross Estate:
- Real Property: Land and buildings.
- Personal Property: Shares of stock, bank deposits, vehicles, jewelry, and business interests.
- Taxable Transfers: Properties transferred during the decedent’s lifetime but intended to take effect at death (e.g., revocable transfers, transfers in contemplation of death).
3. Allowable Deductions
Under the TRAIN Law (effective January 1, 2018), the deductions have been simplified to reduce the tax burden on the heirs.
| Type of Deduction | Amount/Limit |
|---|---|
| Standard Deduction | A fixed amount of ₱5,000,000 (no substantiation required). |
| Family Home | The current fair market value, up to a maximum of ₱10,000,000. |
| Claims against the Estate | Debts or financial liabilities contracted in good faith. |
| Claims against Insolvent Persons | Where the debtor's assets are insufficient to pay the debt. |
| Unpaid Mortgages/Taxes | Taxes accrued prior to death or mortgages on the property. |
| Transfer for Public Use | Bequests to the government for public purposes. |
| RA 4917 | Retirement benefits received by heirs from the employer. |
Note: For Non-Resident Aliens, the Standard Deduction is fixed at ₱500,000, and other deductions are prorated based on the value of the Philippine estate over the entire world estate.
4. The Computation Formula
To arrive at the Estate Tax Due, the following mathematical flow is applied:
- Gross Estate (Total value of all properties)
- Less: Deductions (Standard, Family Home, etc.)
- = Net Taxable Estate
- Multiply by 6% (Flat Rate)
- = Estate Tax Due
The Flat Rate
Prior to 2018, the Philippines used a graduated tax table. Under the current law, a simplified flat rate of 6% is applied to the Net Taxable Estate.
5. Valuation of the Estate
Properties must be appraised based on their Fair Market Value (FMV) at the time of the decedent's death.
- Real Property: The higher value between the Zonal Value (determined by the BIR) and the Assessed Value (determined by the Provincial/City Assessor).
- Shares of Stock: If listed, the arithmetic mean between the highest and lowest quotation on the date of death. If unlisted, the Book Value (for common shares) or Par Value (for preferred shares).
6. Administrative Requirements
Filing and Payment
- The Return: BIR Form 1801 must be filed.
- Timeline: The return must be filed within one (1) year from the date of the decedent's death.
- Extension: The Commissioner may grant an extension of up to 30 days in meritorious cases.
- Payment: "Pay-as-you-file." However, if the estate lacks sufficient cash, the BIR may allow payment by installment within two years from the statutory date for filing, without civil penalties and interest.
Where to File
The return is filed with the Revenue District Office (RDO) having jurisdiction over the last residence of the decedent. If the decedent had no legal residence in the Philippines (non-resident alien), it is filed with RDO No. 39 (South Quezon City).
7. Importance of Compliance
Failure to file and pay estate taxes prevents the legal transfer of titles (e.g., Transfer Certificate of Title for land) and the release of bank deposits to the heirs. Banks are allowed to release funds from a deceased depositor's account subject to a 6% final withholding tax, provided the withdrawal is made within one year from death.
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