Transactions involving the transfer of ownership of immovable property may trigger a tax known as transfer duty, which is payable by the transferee. In the past, heirs faced difficulties in paying transfer duty on inherited property until the Transfer Duty Act was amended, effective from March 1, 2020, to exempt them from this tax. Consequently, not all beneficiaries of immovable property are required to pay this duty. In this article, we clarify this concept and explain why heirs no longer need to worry about transfer duty.ย
The basicsย
Transfer duty is essentially a tax levied on the value of immovable property transferred from one person to another, regardless of the method. This tax is triggered when land or buildings are transferred through a sale, donation, or any other transaction resulting in a change of ownership. The responsibility for paying the tax lies with the beneficiary or recipient of the property. However, transfer duty is not payable on immovable property passed on from a deceased estate to its designated beneficiaries. Importantly, this exemption applies whether or not a will is in place.
The exemption
The Transfer Duty Act specifies that among other exemptions, descendantsโsuch as heirs or potential heirsโare not subject to transfer duty when immovable property is transferred to them from a deceasedโs estate. In other words, if you are a descendant of a deceased person, you do not pay transfer duty. This exemption applies to sons, daughters, and even grandchildren of the deceased. However, the exemption does not extend to beneficiaries who are not descendants. For example, if a person bequeaths land to their child, that child will inherit it tax-free. Conversely, friends or non-related individuals inheriting property from a deceased person will be required to pay transfer duty.
Enter shares
In some cases, individuals invest in companies such that, upon their death, their loved ones gain control of the company by inheriting the shares and, consequently, the companyโs property. For transfer duty purposes, the transfer of shares that ultimately leads to control of immovable property is treated as a transfer of the property itself. Therefore, shares inherited from a deceased estate that result in control of immovable property are considered as transferring the immovable property to the heirs. As a result, the transfer duty exemption applies only to the portion of the share value attributable to the immovable property. For example, if Tiro inherits shares in his grandfather’s company valued at P10 million, with P8 million attributable to immovable property, he will not pay transfer duty on the P8 million. He also wonโt incur inheritance tax on the P8 million. However, the remaining P2 million may be subject to donations tax, which weโll cover another time.
As you can see, it is apparent that heirs need not to worry about transfer duty when inheriting land or buildings. The exemption only applies to the descendants of the late person whether or not a will was left behind.ย
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