Inheriting property from a parent or grandparent is a meaningful benefit – but before title can be transferred to an heir, one compliance must be addressed first: the Estate Tax. It is also one of the most commonly overlooked topics in estate planning.
Without proper understanding and preparation, families risk unnecessary delays, penalties, and legal complications when transferring inherited property. This guide breaks down how the estate tax is computed — in plain terms.
What is Estate Tax?
Estate tax is a tax imposed on the right to transfer of a deceased person’s property to their lawful heirs and beneficiaries at the time of death, and on certain transfers according to law and testamentary disposition.
Moreover, the items included for the computation of Estate Tax include:
- Real Property land, houses, or condominium units
- Personal or Movable property, vehicles, jewelry, and similar assets
- Shares of stock and bonds in corporations
- Other business rights, such as ownership in partnerships or franchise exercised in the Philippines
Hence, whether you are a business owner, a professional, or an employee — if you own assets you intend to pass on, estate tax will eventually apply.
In addition, the estate tax law or rules to be applied depend on the time of death of a decedent. Currently, under TRAIN, the estate tax rate is 6% of the net estate.
Step-by-Step Guide: How Estate Tax is Computed
At first, estate tax computation can be overwhelming, but let us break it down into a simple process.
Step 1: Determine the Gross Estate
The Gross estate is the total value of all assets owned by the decedent at the time of his death.
More importantly, for real property, valuation is based on whichever is higher between the Zonal Value from the Bureau of Internal Revenue or the Fair Value from the City Assessor’s Office.
Example:
Asset Value
- House and lot: ₱10,000,000
- Bank savings: ₱1,000,000
- Car: ₱500,000
- Bonds from Corporations: ₱500,000
Gross Estate ₱12,000,00
Step 2: Apply Allowable Deductions
Deductions granted by tax laws reduce the taxable estate and fall into two categories: Ordinary and Special Deductions.
Ordinary Deductions
These cover unpaid expenses, incurred losses, remaining indebtedness, unpaid taxes, and others, such as:
- Claims against the Estate: debts or demands that would be fulfilled during the lifetime of the decedent
- Claim against Insolvent Debtors: bad debts owed to the decedent that are included in the Gross estate but are uncollectible
- Unpaid Mortgage
- Taxes accrued before the time of death of the decedent
- Casualty Losses: losses incurred during the settlement of the estate due to calamities, robbery, theft, or embezzlement
- Vanishing Deductions: a technical deduction that reduces double taxation on property that was recently taxed in a prior estate.
- Transfer for Public Use: Properties transferred to the government for public use via testamentary manner.
Special Deductions
Special deductions are additional deductions granted by law:
- Value of Family Home: the dwelling house where the husband and wife or an unmarried person who is the head of a family, and members of their family, reside. Note that such value is based on the current fair value of the decedent’s family home, which is up to a maximum of ₱10,000,000 as a deduction.
- Standard Deduction: an automatic deduction granted equivalent to ₱5,000,000
- Retirement Benefits Received by Heirs: Under R.A. 4917, employer-paid benefits due to death or disability are tax-exempt if included in the Gross Estate.
- Share of Surviving Spouse: refers to the surviving spouse’s net one-half (1/2) share of the conjugal partnership or absolute community property, diminished by chargeable obligations. It is also known as the Net Communal Estate, computed by subtracting Ordinary Deductions from the Gross Estate.
Step 3: Compute the Net Estate
Afterward, the Net Estate is computed after subtracting all allowable deductions from the Gross Estate computed.
Example:
Gross Estate = ₱12,000,000
Less: Ordinary Deductions
- Claims against the Estate (₱100,000)
- Claims against Insolvent Debtors (₱100,000)
Estate after Ordinary Deductions = ₱11,800,000
Less: Special Deductions
- Standard Deduction = (₱5,000,000)
- Share of Surviving Spouse = (5,900,000)
Net Taxable Estate = 900,000
Step 4: Apply the Estate Tax Rate
The computation for Estate Tax is Net Estate × 6%
Example:
- Net Taxable Estate equal to ₱900,000 x 6%
- Estate Tax = 54,000
Other Matters to Consider
Aside from having a good grasp on how to compute the estate tax, here are other things to keep in mind:
- Estate tax must generally be filed and paid within 1 year from the death of the decedent.
- Even if deductions make the estate tax due to zero, BIR Form 1801 (Estate Tax Return) shall still be filed for the estate to be officially declared and settled.
- Property cannot be transferred until the Estate tax is settled.
- Vanishing Deductions computations are technical and must meet specific criteria to be valid as a deduction.
- When computing the Gross Estate and Deductions, determine whether each asset was exclusive or forms part of the marriage and was under the provisions of either the Conjugal Partnership of Gains or the Absolute Community Property.
- Special rules apply if the decedent is a Non-Resident Alien.
Estate Tax Due Computation Summary
Plan Early, Avoid Stress Later
Estate tax is not just about compliance; it is a matter of protecting your family from unnecessary financial and legal hassle. Understanding how it is computed is the first step toward planning ahead — especially if you own a property, run a business, or have multiple assets.
Don’t navigate complex tax matters alone. If you encounter complexity, need help with filing, or require expert guidance, contact Babylon2k and schedule a consultation.
