Inheritance and Tax — What You Need to Know?

Inheritance in Israel — Basic Principles

When a person dies in Israel, their assets pass to their heirs in accordance with the Inheritance Law. This usually occurs in cooperation with the court (rabbinical courts for various matters, or through updates to land registry records). But from a tax perspective — it is not as straightforward as it appears.

In Israel, there is no direct inheritance tax as in some countries around the world. This means that the heir does not pay tax on the inheritance itself. But this does not mean there are no taxes at all. There is an important distinction here: the asset itself is not subject to inheritance tax, but income generated from the asset — is. Additionally, there are reporting obligations that if not handled properly, can lead to problems.

A point that is not always clear: if you inherit an apartment, you do not pay tax on the apartment itself. But if you sell it in the future, or if it generates income (rental fees, for example), then there are taxes. And reporting must also begin from the moment the asset passes to you.

Who Has a Duty to Report on Inheritance?

This is a question that comes up frequently. The answer is: every heir who received an inheritance in Israel, in principle. But there are important distinctions.

If you inherit an asset in Israel (an apartment, land, a business, money in a bank) — you have a duty to report to the Tax Authority. This report does not necessarily take place immediately. It must be made within a certain period following the opening of the case in court or in the administration of the estate. Generally, this is within 90 days or in accordance with the court treasurer's instructions.

What is important to understand: if you inherit an apartment, and most of the assets in the estate are an apartment and savings — the report can be relatively simple. But if there is a business, stocks, or assets abroad — it becomes complicated. And there is real risk here: if you do not report properly, the Tax Authority can audit the inheritance retroactively, and this can be expensive.

Another point: if you are inheriting as part of an estate that received assets abroad, or if the deceased had assets abroad — reporting becomes more complicated. You must also report to the Tax Authority on these assets, and in some cases also to foreign authorities.

How is the inheritance reporting process conducted?

Let's go through it step by step, as it happens in practice.

1. Opening a file in court or with the administration — When someone passes away, a file is opened in court (or in a rabbinical court if certain types of assets are involved). This does not depend on you as an heir — it typically occurs through an attorney or through a bank that identifies the assets.
2. Identification of assets — The executor or administrator of the estate identifies all assets of the deceased: bank accounts, apartments, land, businesses, stocks, etc. This also includes liabilities (loans, tax debts).
3. Filing an inheritance report with the tax authority — This is typically the work of an attorney or estate administrator, but sometimes also of an accountant. The report must include a complete list of all assets, their valuation, and the identity of the heirs.
4. Payment of taxes (if applicable) — If there are unpaid tax debts of the deceased, or if there is income generated from the assets (for example, bank interest, income from a business that has not been closed), these must be paid before distributing the inheritance.
5. Distribution of the inheritance to heirs — After settling debts and proper reporting, the assets are distributed to the heirs in accordance with the law or the will.

Each step requires documents: death certificate, will (if it exists), real estate registration documents, bank statements, and more. If something is missing or unclear, the reporting is delayed.

Taxes That May Arise in Inheritance

If there is no direct inheritance tax, then where do the taxes come from?

Income tax on income from inherited assets: If an asset generates income (for example: a rental apartment, a business that continues to operate, a savings account with interest), the tax on that income applies to the heir. This is not a tax on the inheritance itself, but rather a tax on the income generated after the asset passed to the heir.

Transfer tax (registration fees): Generally, when an asset passes through inheritance, there is no transfer tax. This is one of the advantages of inheritance compared to purchase. However, if the heir sells the asset in the future and there is a profit — there is capital gains tax.

Capital gains tax: If you inherit an apartment and later sell it at a profit — there is capital gains tax. Typically, this is 25% of the profit (with some exceptions). However, there is an important point here: if you sell the apartment you inherited as a residence, and you lived in it — you may be exempt from capital gains tax. This depends on the circumstances.

Employer tax and national insurance: If the inheritance includes a business, and it is a business that continues to operate, they apply to the heir as they would to a regular business owner.

One point that is not always clear: if the deceased left a debt (a bank loan, for example), the heir does indeed inherit the debt as well. However, this debt does not affect the heir personally — it is settled from the estate assets before distribution to the heirs.

Common Mistakes in Inheritance Reporting — and How to Avoid Them

During the years we have worked with clients in inheritance processes, we have seen several recurring mistakes:

• Delayed reporting: Many people think that if the inheritance is not closed, there is no need to report. This is a mistake. Reporting must begin at the scheduled time, even if the inheritance is still in process. Delay can lead to issues with the tax authority.
• Incorrect valuation of assets: When reporting assets, you must evaluate them at their current value. If someone reports an apartment at a value much lower than its actual value, it may trigger an audit.
• Omission of small assets: A savings account with 5,000 shekels, or shares in a small company — sometimes it doesn't seem significant, but everything must be reported. The tax authority knows about bank accounts and investment funds.
• Non-disclosure of foreign assets: If the deceased owned assets abroad (an apartment in Europe, a bank account overseas), this must be reported to the Israeli tax authority as well. This requires additional review and more complex reporting.
• Failure to account for income generated before reporting: If the asset generates income (interest, rental fees), and this occurs between the date of death and the reporting date, this income must be reported separately. It is not part of the inheritance itself.
• Using an inexperienced attorney or estate manager: Sometimes heirs choose an inexpensive attorney or estate manager who lacks experience in tax matters. This can lead to mistakes that are discovered years later.

A good way to avoid these mistakes is to consult an experienced accountant or attorney at an early stage, before reporting begins. This saves time and headaches later.

Inheritance of a Self-Employed Person or Business Owner — What Changes?

If the deceased was self-employed or a business owner (exempt business owner, licensed business owner, or a company owner), the inheritance becomes significantly more complex.

When someone who owned a business passes away, the business does not necessarily close. The heir can continue operating it, or close it and sell the assets. Both scenarios create different tax obligations.

If the heir decides to continue the business, they must:

• Report all income from the business as a regular business owner would.
• File annual reports (if the business was required to file an annual report).
• Pay tax advance payments in accordance with income.
• Handle outstanding tax liabilities of the deceased (unpaid annual reports, outstanding advance payments).

If the heir decides to close the business, they must close it properly — file a closure report, close bank accounts, maintain accounting records, and so forth. Here too, taxes may arise.

Another matter: if the business was a private limited company, the inheritance of shares in the company is complex. You need to check the company's articles of association, see if there are agreements with other partners, and so on.

In such cases, it is highly recommended to consult an experienced accountant at an early stage. They can help plan the best course of action — whether to continue the business, sell it, or close it.

Inheritance and Tax Authority Reporting — What Exactly Must Be Reported?

This is a question that comes up frequently: "What exactly must I report?"

The short answer: every asset the deceased owned at the time of death. The longer answer: it depends on the type of asset.

Real estate (apartment, land): You must report the current value of the real estate (usually, the court value or a professional appraisal). You must also report any income generated from the real estate (rental fees, for example).

Bank accounts and savings: Every balance in an account as of the date of death. If there were interest accrued after death, they must be reported separately.

Stocks and securities: You must report every stock the deceased owned and its value on the date of death. If there was an undistributed dividend, it must be reported.

Business or business interest: You must appraise the business (typically, this requires a professional appraisal) and report its value.

Assets abroad: If the deceased owned assets abroad, they must be reported both to the Israeli tax authority and usually to the authorities in the country where the asset is located.

This reporting is typically done through a special form called an "Inheritance Report" and submitted to the tax authority. It is not easy to do alone, especially if there are multiple assets or if they are complex.

When Should You Consult an Accountant Regarding Inheritance Matters?

If you are inheriting only a small sum of money from a bank account, with virtually nothing else there — you may be able to manage on your own. However, in any other case, it is recommended to seek professional assistance.

Here are some warning signs:

• There is real estate in the inheritance: An apartment, land, or house. Real estate valuation and reporting require professional expertise.
• The deceased was a business owner: If you plan to continue the business, or if it needs to be closed, you need assistance.
• There are assets abroad: This requires complex reporting and knowledge of international tax laws.
• The inheritance is large or there are multiple heirs: The larger the inheritance, the greater the risk of errors. When there are multiple heirs, you need to ensure the reporting is fair and clear to everyone.
• You are uncertain about the process: If you are unsure how to begin, or if you have questions — this is a sign that you should seek professional help.

An accountant can assist with several matters: planning the best course of action, preparing financial statements, reporting to the tax authorities, and answering questions that may arise along the way. This saves time and reduces the risk of costly mistakes.

How Ben Or Kook Helps with Inheritance Matters

Ben Or Kook Certified Public Accountants handle inheritances for self-employed individuals, business owners, and companies in central Israel — Ramat Gan and Petah Tikva. We understand that inheritance is a sensitive matter, and also a complex one from a tax perspective.

When a client comes to us regarding an inheritance matter, we assist with the following steps:

Early Planning: We listen to your story — what the inheritance entails, what assets are involved, and what the situation is. Then we help you plan the best approach from a tax and accounting standpoint.

Report Preparation: We prepare all required reports for the tax authorities, tailored to the type of assets and complexity of the inheritance.

Filing and Reporting: We file reports with the tax authorities on your behalf and manage all correspondence.

Ongoing Support: If questions or issues arise along the way, we are here to help. And even after the inheritance is settled, we can assist with tax matters that emerge later (asset sales, management of inherited businesses, etc.).

We believe that proper reporting at the right time prevents problems down the road. Additionally, we treat each client as a person — not just as a tax case. We listen, explain, and help.