Israel Step-Up upon Inheritance
Updated: Mar 17, 2021
As of today, Israel does not apply estate tax upon death, as opposed to other countries (such as the US and the UK) that do. This is good news. However, Israeli taxation also does not grant a tax credit on the foreign tax paid, or a step-up with respect to any foreign property value inherited, neither through its local tax laws (ITO) nor through its income tax treaties. This is less good news for Israeli tax residents who own foreign assets. Consequently, if the deceased was an Israeli tax resident, the Israel Tax Authority (ITA) will still impose a capital gains tax on the sale of the foreign asset that was inherited by an Israeli resident, even though the same asset may already have been taxed abroad (estate tax), according to the cost basis of the last person that paid consideration for the asset. Although it may recognize the foreign estate tax as an expense that may reduce the capital gains tax at the time the property is sold, this slight relief shall not eliminate the double taxation outcome. Had the deceased sold the asset prior to his passing he may have had to pay capital gains tax in the foreign country but he would, most likely, have received a tax credit in Israel on this tax eliminating the result of double taxation. If the deceased was a non Israeli resident that bequeathed a foreign asset to an Israeli resident, it may be possible to apply for a step-up basis through a fast track procedure via a tax ruling, (known as the “Green Track”), by filing form 905. Under this mechanism, the ITA, will “step up” the asset’s value to its FMV at the time the non Israeli resident deceased, (regardless of whether foreign tax was paid abroad). This will usually result in a lower Israeli capital gains tax at the time of the sale of the inherited asset, since the valuation date would be considered the bequeathed acquisition date. It is important to note that the ITA does not automatically give out this ruling, a request must be filed and certain conditions must be met. In addition when given, the ruling will include limitations (for example depreciation would not be recognized on the asset when sold, this ruling will not apply if the consequent sale is to family members of the bequeathed as mentioned in clause 88 of the ITO, limitations on losses credited against the gain from the sale etc). In countries that apply inheritance tax, such as in the US and in the UK, one automatically receives a step-up basis, upon inheriting a property. This means that upon the death of the owner the asset receives a new (and usually higher) value basis which is the fair market value at the date of the owner's death. Consequently, if one inherits property and later sells it, the pay capital gains tax paid is based only on the difference between the time it was sold from the time it was inherited. Conclusion: Estate planning is critical for many reasons, taxes being only one of them. It is therefore strongly advised to prepare oneself properly for the inevitable with the help of an attorney familiar with all aspects and the consequences of such planning. In the event that one owns assets outside his country of residency, it may be necessary to seek advice from a local attorney there as well. The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances.