1. Israel Abolished Inheritance Tax in 1981
In 1981, Israel abolished its inheritance tax entirely. There is currently no tax imposed solely by reason of inheriting Israeli assets — whether cash, securities, real estate, or other property. This makes Israel relatively favourable for international estate planning compared to countries like the United States (federal estate tax) or the United Kingdom (inheritance tax at 40%).
However, "no inheritance tax" does not mean "no taxes at all" for foreign heirs. The following taxes and obligations are relevant and should be understood before you distribute or deal with inherited Israeli assets.
2. Betterment Tax When You Sell Inherited Real Estate
When you sell inherited Israeli real estate, you may owe betterment tax (mas shevach) — Israel's capital gains tax on real property. The tax is calculated on the increase in value of the property from the date of the deceased's original purchase to the date of your sale.
The rate is currently 25% for non-residents. For a property that was the deceased's only residential apartment and was owned for many years, an exemption from betterment tax may apply — but only if the heir meets specific conditions (including using the sale proceeds to purchase in Israel, or if it is the heir's only Israeli apartment).
Key point: the "step-up" in basis that US and UK heirs are accustomed to does not exist in Israeli law for betterment tax purposes — the gain is measured from the deceased's original cost, not from the date of death.
3. Purchase Tax Exemption for Inherited Property
The good news: heirs who receive Israeli real estate by inheritance are exempt from purchase tax (mas rechisha). This is a significant saving — non-resident buyers normally pay 8%–10% purchase tax. Inheriting is therefore tax-free at the point of acquisition.
4. Rental Income Tax on Inherited Property
If you decide to keep inherited Israeli property and rent it out, the rental income is subject to Israeli tax:
- Residential rental: Option to pay flat 10% on gross rent (no deductions allowed), or standard progressive rate with full expense deductions
- Commercial property: Progressive marginal rates plus VAT obligations
5. Tax Obligations in Your Home Country
Even though Israel imposes no inheritance tax, your home country may tax you on the receipt of an Israeli inheritance. For example:
- United Kingdom: UK inheritance tax applies to the worldwide estate of a UK-domiciled deceased. A UK beneficiary receiving assets from a non-UK estate may also have IHT exposure depending on domicile rules
- France: French heirs may owe French inheritance tax on inherited foreign assets, with rates depending on relationship to the deceased
- Germany: German inheritance and gift tax applies to worldwide assets if either the deceased or the heir is a German resident
6. US Taxpayers and Israeli Inheritance
US citizens and Green Card holders have specific reporting obligations:
- Form 3520: If you receive a gift or inheritance from a foreign person exceeding $100,000 in a year, you must report it on IRS Form 3520 (purely informational — no US tax is due on receipt)
- FBAR / FATCA: If you hold Israeli bank accounts or financial accounts with aggregate balances over $10,000, you must file FinCEN 114 (FBAR) and possibly FATCA Form 8938
- US estate tax: No US estate tax applies to assets inherited from a non-US person, unless those assets have US situs