The difference between inheritance tax and estate tax- what's important to know?
Although inheritance tax and estate tax are often thought to be the same, they differ significantly in how they are applied. Inheritance tax applies to the heir or beneficiary once the inheritance has reached them, whereas estate tax applies directly to the assets at the beginning of the process, before reaching the heir.
In Israel, between the years 1949-1981, an estate tax was imposed, ranging from 40%-70% however, in 1981 the estate tax was abolished, and currently, there is no inheritance or estate tax in Israel. However, it is important to note that the estate tax may return in the future. As of today, when inheritance assets are sold the relevant taxes, such as capital gains tax, must be paid. In other words, while individuals inheriting a specific asset in Israel are exempt from Inheritance tax, they will be subject to capital gains tax, upon selling it.
Reasons for the Abolishment of Estate Tax
The main reason for the abolishment of estate tax in Israel was the decline in inflation it faced, leading to no notable improvement in wealth distribution, alongside high enforcement costs. Though, in recent years there have been calls for the reinstatement of estate tax in Israel due to inheritances not within the free market, which exacerbate social inequalities in the country.
Recommendations for implementing an Estate or Inheritance Tax
In 2000, the public committee for the income tax reform gathered to discuss the reinstatement of estate tax in Israel. The committee believed that in order to minimize enforcement costs while still imposing such a tax, it must target taxpayers whose transferred assets exceed two million shekels, and the rate must be relatively low. Meaning, granting a tax exemption up to the rate mentioned enhances enforcement effectiveness, as it applies to a limited population of taxpayers liable for this tax. Key recommendations from the committee suggested a tax rate of 10% on the estate value of individual Israeli residents, and in certain cases, an allowance for the tax payment to be spread out over several years. Regarding trusts, the transfer of assets to a trust would not be considered a gift, but the value of the trust’s assets would be added to the estate tax base.
Even today, discussions regarding the reinstatement of estate tax are ongoing, particularly due to the war and the desire to attract additional funds to the state treasury.
Although there is currently no inheritance or estate tax in Israel, in cases where taxpayers receive inheritance from abroad, tax will be imposed according to various treaties. Generally, the further the family connection between the deceased and the taxpayer, the lower the tax rate. For additional information about taxes on foreign inheritances, click here.
Our firm specializes in international taxation and offers tax advisory services concerning gifts and inheritances from abroad as well as the acquisition of assets in Israel, while also preparing for possible future enforcements of estate tax on various assets in the country. To schedule an introductory consultation, click here.
