How Is Inheritance Tax Computed?

Inheritance tax is a levy or tariff paid by an individual who inherits or becomes heir. Either in the form of money or property from another person. The tax amount that the beneficiary pays depends on the location; tax laws differ between states and countries.

Inheritance tax becomes an issue when someone dies. It is a one-off tax paid on the value of the deceased’s estate above a set threshold.

In the Philippines, inheritance tax is the same as estate tax. It is defined by the Bureau of Internal Revenue (BIR) as thus:

“Estate tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.”

While some laws define inheritance tax and estate tax as one and the same, others keep the two separate. For most, estate taxes are generally defined as taxes that are assessed on the assets or estate of the deceased, while inheritance taxes are assessed on the inheritances received by the beneficiaries.

In simpler terms, Philippine inheritance/estate taxes are paid by the heirs, beneficiaries, executor, or the administrator in order to transfer property to beneficiaries or an heir upon the decedent’s passing. While calculated against the value of the net estate, it is not considered a tax on property because it is only imposed at the time of the estate owner’s death.

How is Estate/Inheritance tax determined?

One can calculate Estate/Inheritance tax is by first determining the value of the previous owner’s net estate. This is done by getting the difference between the previous owner’s gross estate; as defined under Section 85 of the Tax Code, and the allowable deductions of the decedent, which is defined under Section 86.