OF DEATH, TAXES AND ‘COMPULSORY HEIRS’

Death and taxes in particular estate taxes present a unique problem when purchasing property in the Philippines, but one which fortunately has solutions.

Print Like the majority of countries, the Philippines imposes estate taxes on the properties of both locals and foreigners which are situated in the Philippines upon their deaths. However, most investors who buy through the usual channel from the large developers are not aware of this.

The Philippine property market is still very underdeveloped when it comes to the ability of the sales people working for big developers. Generally, they are very focused on making the sale and hence omit to inform the buyers on the many different modes of purchase and their respective ramifications.

On a more favourable note, the estate taxes on death are not that high compared with other countries. The Philippines operates a tiered system where the higher the value of your estate/ property, the more estate tax is levied. There is also a limited time to pay the estate taxes and if the taxes are not paid on time, then there are heavy penalties incurred which will quickly reduce the value of even the largest estates.

Like with most things in life, careful planning can help you understand the implications of these ‘estate taxes’ and thereby have your estate passed on to your beneficiaries in an orderly and cost-effective manner.

Avoiding ‘estate taxes’

The usual way to buy is as an individual or jointly as a couple and this applies to the majority of people including both foreigners and locals. In the unfortunate event the owner of the property dies, ‘estate taxes’ become due and payable. Failure to pay the taxes will result in the property being unable to be sold or the title transferred.

Penalties for failure to pay estate taxes are very high and are in the region of 20% per annum which means within a few years, the taxes could be higher than the actual value of the asset!

A simple and reasonably cost effective way to prepare for this expense for both foreigners and locals is to set up a life insurance policy in trust to cover the estate taxes, which you will need to work out in advance. The policy would need to be reviewed over the years to take into account the capital appreciation of the property and therefore higher ‘estate taxes’ due.

It is also possible to purchase property through a Filipino company and many investors who buy multiple units are likely to use this route. The advantage of purchasing property through a company is that it avoids ‘estate taxes’. This is because a company does not technically ‘die’. This enables property and other assets in the company’s name to be passed free of estate taxes to various beneficiaries.

On the flipside, the purchase of property through a company will be more complex and expensive and will likely make it harder to get mortgage financing. For many clients though who are not borrowing and who are keen to pass on their property to their beneficiaries without having to pay high ‘estate taxes’, this will prove an attractive option.

inves3Clearly, the issue of ‘estate taxes’ is often not considered when buying property, which is a mistake for many buyers in the Philippines as the beneficiaries could be left with unexpected hefty taxes to pay. For unwary foreign investors, this is particularly true.

On a related note, it is essential that foreign purchasers consider whether they have a Will in the Philippines or their country of birth. This is because Philippines law provides for certain so-called ‘compulsory heirs’. This may mean that your estate could be passed on to people whom you may not have wanted to inherit your inheritance. The solution is to have a Will made in your home country, which will be accepted by the Philippine courts and which takes precedence over the ‘compulsory heirs’ law.

james

James Hartland has been involved in property investment in the UK, Europe, Middle East and the Philippines. He can be contacted at j.hartland@astraasia.com www.astraasia.net

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