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The variety of transfer taxes is quite confusing. The amendments introduced by the Tax Reform for Acceleration and Inclusion (TRAIN) Law or Republic Act No. 10963 now provide much clearer rules for taxpayers.
Before the TRAIN Law, the Tax Code had a complicated estate tax schedule with rates ranging from 5% to 20% based on the value of the net estate of the decedent. TRAIN, which amended Section 84 of the old Tax Code, now imposes a flat 6% rate.
For donor’s tax, the previous Tax Code contained a complex tax schedule with different tax rates for relatives and strangers, which the Tax Code calls non-relatives. With the TRAIN Law, that schedule has been likewise simplified to a single tax rate of 6% of net donations for gifts above P250,000 yearly, regardless of the donee’s relationship to the donor.
The Department of Finance (DoF) explained that lowering estate and donor’s tax would harmonize the existing transfer tax legislation, regardless of whether the person died, donated a property, or simply wanted to transfer a property. The DoF added that while this change would result in lost revenue, one of the goals was to make the land market more efficient in order for land to be used for the best purposes.
It is worth noting that despite the uniform rate for donor’s and estate taxes, there are still some key points to take into consideration.
The requirement of filing a Notice of Death within two months from the time of death is no longer required and the filing of returns within six months has been changed by virtue of the amendments introduced by the TRAIN Law. Under the present tax law, estate tax returns must be filed and the tax must be settled within a year from the time of death to avoid penalties. But heirs now have the option to pay in installments should there be insufficient cash in the estate to cover the total estate tax due.
Another interesting amendment is that funeral, judicial and medical expenses can no longer be deducted from the gross estate in the computation of estate tax. However, while the TRAIN Law removed these deductible expenses, it increased the Standard Deduction to P5 million pesos from the previous P1 million, which is available to resident and non-resident citizens. On the other hand, non-resident aliens are entitled to a deduction of only up to P500,000.
Another significant amendment is the increase in the threshold of the fair market value of family homes that are exempt from estate tax. Under the old law, the allowable deduction must be in an amount equivalent to the current fair market value of the family home (or the extent of the decedent’s interest, whichever is lower), but not exceeding P1 million. The TRAIN Law now provides that if the current fair market value of the family home exceeds P10 million, only the excess shall be subject to estate tax.
Perhaps one of the areas in the previous estate tax law that received much attention was the fact that the administrator of the estate could only withdraw P20,000.00 from the estate of the decedent. This created difficulties for the administrators considering the high cost of a funeral service, its allied activities, and post-funeral requirements. The TRAIN Law gives more leeway for the estate administrators as any amount may now be withdrawn from the deceased’s bank account, subject only to a 6% final withholding tax.
There are also some interesting amendments to the donor’s tax provisions.
Under the old law, donations to a non-relative were taxed at 30% and the P100,000 exemption was not allowed. Thus, during estate planning, properties that were intended to be given to non-relatives were better left in the estate. Under the TRAIN Law, the donor’s tax is fixed at 6% based on annual total gifts exceeding P250,000 in a calendar year, regardless of whether the donee is a relative or not.
The time of filing of returns and payment of tax remains the same under the TRAIN Law. Donors are required to file a return and pay the full tax due within 30 days from the date the gift is made. For several gifts made in one calendar year, the donor is required to make a consolidated return within the same period after the date of each gift for the proper computation of donor’s tax.
Unlike estate tax, no deduction can be made from the total gifts made in a calendar year but the TRAIN Law has increased the threshold of exemption from P100,000 to P250,000. Thus, one can take advantage of the said exemption by spreading out the gifts during one’s lifetime. This cannot be done in estate tax because there is only one event that would determine when estate tax will attach, i.e. the death of the decedent.
Since valuation of properties is determined at the time of death or when the gift was given, one may consider donating his or her real property instead of leaving the same in his or her estate because the value of real properties generally increases over time. If the real property is left in the estate instead of being donated at an earlier time, the tax payable would be higher.
Interestingly, under the old law, estate planning had become a major service for legally minimizing the taxes incurred during the transfer of property because of the varying rates of transfer taxes. Under the TRAIN Law, a question may be raised about the relevance of estate planning at least from a tax standpoint.
Needless to say, there are many other factors besides the tax rate that need to be considered in determining the ideal mode of gratuitous transfer of property and assets. These include distributing an estate to the satisfaction of all heirs, ensuring that the decedent’s wishes are observed, ensuring property goes to the right beneficiaries, establishing trustees for the estate, and others. There are, in fact, other pertinent areas where competent estate planning can make a significant difference for one’s beneficiaries, notwithstanding the new uniform transfer rate. But for the time being, the fixed flat rate of 6% has been viewed as a welcome and equalizing change.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Ana Ria G. Balingit is a Senior Associate Lawyer at SGV – Financial Services Tax.