When it comes to inheritance taxes, Israel is known as a “tax haven”, since the tax was cancelled in 1981. A quasi-inheritance tax continues to exist by way of capital gains tax when selling a property in Israel.
An estate of an Israeli citizen and/or resident may be subject to foreign inheritance tax for many years after he or she relocated to Israel.
A tax imposed on inherited funds and assets is known as inheritance tax. A percentage of the inheritance value is taxed on inheritances whose value exceeds a certain amount determined by law. The inheritance tax is intended to reduce inequality caused by the accumulation of capital in the hands of a few over generations.
Generally, estate tax and inheritance tax have different tax bases or different taxpayers. The estate tax is a transaction tax in which the assessment is made on the entire estate, before the transfer was made to the heirs. In the context of estate tax, the last shekels of the estate are taxed at each step’s rate. Israel accepted this type of taxation.
Inheritance tax is also a transaction tax or an income tax on inheritance where the taxpayer is the heir. The inheritance tax is a personal tax on each taxpayer, so that different heirs will pay different rates. Among the main factors considered when determining tax brackets are the type of relationship between the heir and the testator (the more initial the relationship, the lower the tax; for instance, the tax burden on the son will be lower than that on the nephew) and other income the heir has. With the same tax bracket between inheritance taxation and estate taxation, inheritance taxation will yield less revenue for the state, since the estate will never have a high tax bracket or similar to that of the heir.
Every state has its own inheritance tax laws. Generally, the heir spouse is not subject to inheritance taxes or enjoys substantial exemptions. Different types of assets are subject to the tax: real estate, cash, financial assets, life insurance money, and personal belongings of the deceased (valued through an appraiser).
To be effective, the inheritance tax must also be combined with a gift tax. Depending on the time limit of the gift (for example, if a gift is given up to 7 years before death, it will be taxable), or the value of the gift, gift taxes may apply. A variety of assets and gifts are exempt from inheritance tax in various places: factories and family farms may be exempt from inheritance tax (partial or full) and there may be an inheritance tax exemption for funds transferred to charity or political organizations.
1949
The Knesset enacted an Inheritance Tax Act. The law exempted donations to the state, local councils, the Jewish National Fund, and the Keren Hayesod from taxation. Based on the proximity of the heirs to the deceased, the tax rate and the dissolved estate amount were determined. The highest tax bracket for descendants of the deceased was set at 40%, while the highest tax bracket for distant relatives was set at 70%.
1955
The government sought to amend the Israeli Inheritance Tax Act to give the commissioner in charge of inheritance tax more tools to collect the tax. A committee was set up to examine the estate tax, and several proposals were submitted to the Knesset aimed at finding ways to increase revenue. MK Yohanan Bader of the Herut party proposed that the tax be abolished due to its inefficiency.
1957
The Ministry of Finance sought to establish a tax relief program for foreign nationals because the tax interfered with foreign investment in Israel.
1958
The Knesset debates a uniform tax bracket and raising the estate tax rate regardless of the relative status between heirs and the deceased. There was also discussion about extending the period before death, during which gifts would be considered part of the estate, from 3 to 7 years. As part of the debate, MK Nahum Levin requested that the tax be repealed altogether due to the damage caused by the withdrawal of investments from foreign investors.
The debates lasted several years and triggered a wave of opposition mainly from the Herut and Liberals. As a result of the criticism, which convinced many that the estate tax would also harm the middle class, many alterations were made to the bill.
As part of the proposal, the valuation of a residential apartment would be lowered to avoid the need to sell the apartment to pay the tax. Consequently, the coalition proposed a complete exemption from taxation on pensions, compensation, and residential apartments.
1964
The amendment to the law was approved. While the amendment’s purpose was to increase collections, it included so many loopholes that heirs argued that it facilitated them.
1969
The IRS conducted an examination of the tax to close loopholes and alleviate widows affected by inflation
1969
The Supreme Court ruled that assets registered in the name of the deceased husband were half owned by his widow, and therefore, half were not subject to estate tax.
1970
Tax on gifts was proposed by the Treasury to increase tax revenue. The bill law unsuccessful.
1974
A subcommittee of the Asher Committee proposed updating the tax brackets in response to inflationary erosion, as well as raising the maximum tax rate from 60% to 75%.
1979
Simcha Ehrlich raised the tax threshold of the Israeli Inheritance Tax to a very large extent.
1979
the State Revenue Administration proposed, in an attempt to simplify the tax system, abolishing the estate tax or raising the tax threshold and completely exempting residential apartments from the Israeli Inheritance Tax.
1980
The threshold for exemption from Israeli Inheritance Tax was raised to NIS 1 million.
1982
The estate tax was abolished, and the Israeli Inheritance tax offices were closed in October 1982.
