In most developed countries, including Israel, taxes have historically been imposed on assets and money passed on by inheritance. Since the beginning of the 21st century, however, a growing number of countries have moved to abolish inheritance taxation. Sweden, Norway, the Czech Republic, Russia, Austria, and Hong Kong, among others, have done so. Quite a few countries still levy the tax, including the USA, Germany, the UK, France, Denmark, and Japan.
Israel abolished inheritance taxation relatively early, in 1981. Therefore, as of 2023, there is no inheritance tax in Israel. That said, if the deceased left behind debts and not only assets, those debts must be settled out of the inherited assets, which functions as a kind of “indirect tax” on the inheritance.
Inheritance taxation in Israel
As early as 1949, just one year after the establishment of the state, an inheritance tax was introduced under the Estate Tax Law, 5709-1949, where it was called the “estate tax.”
Estate tax rates were set as different percentages of the total value of the estate, according to graduated value brackets.
Section 2 of the Estate Tax Law provided: “Estate tax shall be imposed on the balance of the estate of a deceased person and shall be paid from the assets of the estate.”
The “balance of the estate” was defined as the value of all estate assets after deducting certain amounts, chiefly the value of assets exempt from estate tax, the deceased’s debts, and sums set aside for the deceased’s spouse and children.
The estate tax in Israel: criticism and abolition
The estate tax drew criticism in Israel on several grounds: that it was ineffective, since the revenue it produced was small; that it deterred foreign investment in the country; and that it amounted to double taxation, since the deceased’s assets had already been taxed during his lifetime (through income tax, real estate taxes, and so on), so there was no reason to tax them again after his death. Religious figures also raised a halachic objection, arguing that only the deceased’s descendants are entitled to benefit from his assets upon his death.
In 1979, 30 years after the tax was first imposed, the tax threshold was raised significantly, leaving at least 90% of Israeli citizens exempt from estate tax. Two years later, in 1981, the tax was abolished entirely.
Since the abolition, proposals to revive the tax have surfaced from time to time, so far without success. The Ben-Bassat Committee recommended in 2000 that inheritance taxation be reinstated, but its recommendation was not adopted. In 2015, then Finance Minister Moshe Kahlon proposed reintroducing the tax, though only on very large inheritances worth over 10 million NIS, and even then at a rate of only 10% to 20%. His proposal was not adopted either.
Inheritance taxation and the appreciation tax exemption on selling inherited real estate
As noted above, there is currently no inheritance tax in Israel on receiving inherited assets, including inherited real estate. Section 4 of the Real Estate Taxation (Appreciation and Acquisition) Law, 5723-1963, states explicitly that “inheritance is not a sale.” Inheriting real estate is therefore not treated as a sale of real estate, and it is exempt from real estate taxes.
An heir who receives real estate pays no tax on the inheritance itself. If he later decides to sell the property, however, he must pay appreciation tax, Israel’s capital gains tax on real estate, like any other seller, unless he qualifies for an exemption under the law.
One such exemption is granted under Section 49B(5) of the Law on the sale of a qualifying residential apartment received by inheritance (it does not cover every inherited property, only a qualifying residential apartment).
Under this section, a person who inherits a qualifying residential apartment may be exempt from appreciation tax on its sale, provided all of the following cumulative conditions are met:
- The heir is the spouse or descendant of the deceased, or the spouse of a descendant of the deceased. The exemption is not available to an heir who is, for example, the deceased’s brother or father.
- Before his death, the deceased owned only one residential apartment, or only part of such an apartment (“residential apartment” is defined in Section 1 of the Law as an apartment or part of an apartment).
- Had the deceased still been alive and sold the apartment himself, he would have been entitled to an exemption from appreciation tax on the sale. Note that the test is whether the exemption exists at the time the inherited apartment is sold, not at the time of the deceased’s death.
Note also that the exemption under Section 49B(5) of the Law does not depend on how many apartments the heir owns, or on how many appreciation tax exemptions the heir has already used in the past.
Inheritance taxation and the tax exemption when heirs divide estate real estate
In many estates the deceased leaves several real estate properties to several heirs, and the heirs want to divide those properties among themselves, transferring them from one to another, differently from the allocation under the inheritance order or the probate order. On its face, transferring real estate between heirs could be treated as a sale, exposing them to real estate taxes: appreciation tax and purchase tax.
In such a case, however, the heirs can sign an estate distribution agreement and receive an exemption from these taxes under Section 5(c)(4) of the Real Estate Taxation Law, subject to all of the following cumulative conditions:
- The estate distribution agreement must be signed before the estate is actually distributed. For real estate, that means before the heirs’ inherited rights are registered in their names at the Land Registry (Tabu) or the Israel Land Authority.
- The agreement must be made solely between the heirs themselves, without bringing in any parties from outside the circle of heirs.
- The agreement must deal solely with the assets of the estate. If equalization payments are needed to balance the division, they too must come solely from the assets and funds of the estate.
