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Money Matters

Here's Why Settling Estate Taxes on Time Can Save You Money

Paying inheritance tax on time can spare you from those hefty penalties and interest rates

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Photography: Shutterstock (Main Photo)

Estate tax, or inheritance tax, seems like a very complex responsibility on the part of a deceased loved ones. Talking about what a parent has left behind can be an extremely sensitive topic, especially since most Filipinos don’t bother to create a will. 

We ask three lawyers to shed light on why settling estate taxes is important, what the current rates are, why people need to pay them on time, and the available options to make payments more pocket-friendly.

Since the implementation of the TRAIN Law in 2018, what are the changes in estate tax rates? How are the new tax rates different from the old ones?

“The magic number that you have to be aware of is the number six. Kasi the estate tax has now been converted to 6%. In the old law, the more estate you have, the higher the percentage,” says Atty. Erwin Zagala of Legal Guide Philippines.

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“Because of the TRAIN Law, the rate of estate tax is now similar to donor’s tax and capital gains tax for capital assets…Prior to the TRAIN Law, a transfer of the same asset via sale would have been the most cost effective mode, while the inheritance route then could possibly be the most expensive one,” adds Atty. Jose-Antonio Aliling, managing partner of Acubelaw/Jose Antonio Aliling & Associates.

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Prior to the new tax rates, people were more inclined to prefer making a Deed of Donation or Deed of Sale since either appeared to be more practical than paying estate taxes.

READ: A Guide to Home Buying Terms, from Amortization to Zonal Value

How can estate taxes be cheaper?

“There are certain deductions that are available. So, assuming that you're able to avail of those deductions, then it can be cheaper versus i-dodonate mo or ibebenta mo lang,” Zagala clarifies.

Aliling details, “A significant change brought by the TRAIN Law that affects the net taxable estate is the increase of standard deduction from P1,000,000 to P5,000,000. Further, the Family Home deduction, which used to be P1,000,000 or fair market value, whichever is lower, has increased to not exceeding P10,000,000. These deductions add to the argument that a transfer via inheritance can be the most cost effective mode of transfer in terms of tax impact.”

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Are there any changes in the deadlines for paying estate taxes?

Before, the family of the deceased who owns the property was required to submit a Notice of Death within one month. Fortunately, that requirement has already been scrapped. “The other thing is, before, within six months, you have to be able to complete everything that needs to be submitted to the BIR. Now, the lawmakers kind of realized that this was not enough time considering the fact that the family is grieving, and there’s so much going on,” states Zagala. Under the new law, the deadline has now been extended to one year.

What if the estate taxes remain unpaid?

First of all, a new certificate of title cannot be transferred without the appropriate tax payment and consequent tax clearance,” Aliling replies. “Furthermore, when the taxes remain unpaid, the government may proceed with the assessment and collection of the taxes due, while strictly observing due process,” as stated in Sec. 203, 222 of the National Internal Revenue Code (or NIRC).

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Are estate taxes retroactive? For instance, the family has not been able to pay the taxes prior to the implementation of the new rates, which rate will then apply?

If the decedent, or the person who has passed away, died prior to January 2018 when the TRAIN Law was implemented, the old tax rates (i.e., the graduated rates) will apply, according to Zagala. After January 2018, the new estate tax rates will be followed.

But there’s some good news: the government is currently offering a tax amnesty. Atty. Ramon Ramirez, Zagala’s partner at Legal Guide Philippines, cites an example: “Let's say namatay siya December 2016, so old law pa rin ‘yan under RA 8424, which is yung previous natin na estate tax law. You’re going to need to pay based on the graduated rates.”

With the amnesty, however, the government waives the charges or the penalties. “But you're going to have to declare something, let's say, the gross estate and then minus certain deductions, and then you'll get to your net estate. And then on that, they'll apply the 6% rate. So may babayaran pa rin sa estate tax…but it's only based on the 6%.” Ramirez encourage everyone to take advantage of this because it’s only offered until June 14, 2023. After that, the old rates will still apply if the decedent passed on prior to the TRAIN Law implementation.

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Zagala and Ramirez created a booklet to help people understand this financial obligation. Click here to get your FREE E-book.

What happens when the owner of the property dies? How can the heirs settle the taxes? Stay tuned for Part 2 of our feature on estate taxes.

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