Will Israel Tax an Inheritance You Receive From Abroad?
No. Israel has no estate tax and no inheritance tax, so when a relative abroad dies and leaves you money, property, or investments, you receive it free of any Israeli charge on the inheritance itself7. The Israeli side is genuinely settled. The cross-border issues that actually matter for an oleh sit on the other side of the world: any death tax owed is the estate's liability, paid abroad before you see a penny; US heirs get a valuable cost-basis step-up; and a US-person heir has an IRS reporting form to file.
Not advice
Almost every new oleh is blindsided in the opposite direction from what they fear. In the US you might brace for a tax bill on money you inherit; in Israel there is simply no such tax to pay. What trips people up instead is assuming that "no Israeli tax" means "nothing to do." If you hold a US or UK passport, the home-country reporting and the shape of the assets you inherit still need handling, and that is what the rest of this guide walks through.
Who actually pays the estate tax, you or the estate?
A point worth getting straight before anything else: an estate taxis a tax on the deceased person's estate, not a tax billed to you the heir. In the US, the executor files Form 706 and the estate pays any US estate tax out of estate assets before the remainder is distributed5. In the UK, Inheritance Tax is likewise charged on the estate and settled by the executor before beneficiaries receive their share6. By the time the money reaches your Israeli bank account, that liability has already been dealt with abroad. You are receiving a net distribution.
This matters for olim because the panic usually comes from conflating two different things: a tax on the estate (settled at the source, abroad, by the executor) and a tax on the heir (which Israel does not impose at all). Neither one lands on you in Israel. The practical consequence is that your job as the heir is mostly administrative: receive the funds, satisfy your bank's checks, and file any home-country information return you owe.
What is the US cost-basis step-up and why is it so valuable?
Here is the single most valuable cross-border feature for a US-person heir. When you inherit an asset, its cost basis is stepped up to its fair market value on the date of death under US rules3. Decades of unrealised gain that built up in the deceased's hands can simply vanish for US tax purposes. If you later sell, your US capital gain is measured from the date-of-death value, not from what your relative originally paid.
Israel takes the opposite approach: it uses carryover basis on inherited assets. When an heir later sells inherited Israeli securities or real estate, Israeli מס שבח (mas shevach)(the real-estate appreciation tax) or capital-gains tax is computed from the deceased's original purchase price, not the date-of-death value. So a US-person oleh selling an inherited asset can face a near-zero US gain (stepped-up basis) and a larger Israeli gain (carryover basis) on the very same sale. The two systems measure the gain from different starting points, which is exactly the kind of inversion a lifelong Israeli never has to think about.
Worked example: inherited US shares, home vs Israel
Your father in the US bought shares for $40,000 in 1995. He dies in 2026 when they are worth $200,000 and leaves them to you, an oleh in Israel. The estate (if large enough) deals with any US estate tax before distribution; you receive the shares net.
US side (step-up): your basis steps up to the $200,000 date-of-death value3. If you sell soon after for $205,000, your US capital gain is only $5,000. The $160,000 of lifetime appreciation is wiped out for US purposes.
Israeli side (carryover):Israel does not recognise the step-up. For Israeli capital-gains tax, the gain is generally measured from your father's original $40,000, so the Israeli taxable gain on that same sale is far larger. You may have foreign tax credits and treaty relief to coordinate the overlap, but the starting points differ, so model the sale with a cross-border adviser before you click sell.
What is Form 3520 and do US-person heirs have to file it?
If you are a US person and you receive more than $100,000 in gifts or bequests from a nonresident alien (a non-US individual) or their foreign estate in a single year, you must report it to the IRS on Form 35201. Read that carefully: Form 3520 is an information return, not a tax. Reporting the bequest does not create a tax bill. But the penalty for missing it is severe: up to 25% of the amount you received for a return that is filed late or incomplete2.
That asymmetry is the trap. A US-citizen oleh who inherits, say, $300,000 from a parent abroad owes no US tax on the inheritance, but a missed Form 3520 can expose them to a penalty measured in tens of thousands of dollars on money that was never taxable in the first place. The form is due with your annual US return (including extensions). Olim who only learn about FBAR and FATCA often never hear about Form 3520 until it is too late, so put it on your list the moment a foreign inheritance is in play.
Form 3520 is reporting, not a bill
What If You Inherit a Foreign Mutual Fund? The PFIC Problem
This is where a foreign inheritance turns from simple to thorny for US persons. Cash is easy. But if you inherit a non-US pooled fund (a foreign mutual fund, a UK unit trust, an Israeli קופת גמל (kupat gemel) or any other foreign collective investment), that fund is a Passive Foreign Investment Company (PFIC) in the hands of a US person from the moment you own it4. PFICs carry punitive US treatment: the default section 1291 regime taxes gains and certain distributions at the highest historic ordinary rates plus an interest charge, and you must file Form 86214.
The step-up helps but does not make a PFIC disappear. You inherit a PFIC, full stop, and your ongoing reporting obligations begin. The right move depends on facts: sometimes selling the inherited fund quickly (when the stepped-up basis means little built-in gain) limits the damage; sometimes a mark-to-market or qualified-electing-fund election is available; often the cleanest path is to convert inherited foreign funds into US-domiciled holdings. None of this is DIY. If your inheritance includes a pooled fund rather than cash or individual shares, that is the trigger to get a cross-border tax professional involved before you do anything with it.
How do you bring an inheritance into Israel?
Once the home-country side is handled, repatriating the inheritance to Israel is largely a banking exercise. Three things to plan for:
- Source-of-funds documentation. Israeli banks run anti-money-laundering checks on large incoming transfers. For an inheritance, your bank will typically ask for proof: a death certificate, a copy of the will or probate/grant, and a letter or statement showing the funds came from the estate. Gather these before the transfer, not after, or the money can sit frozen pending review. Have your מס הכנסה (mas hachnasa) (income-tax) context ready too, even though the inheritance itself is not Israeli-taxable.
- FX timing. An inheritance arriving in dollars, pounds, or another foreign currency has to be converted to shekels at some point. The rate you get materially affects the final amount. You do not have to convert it all at once on the day it lands; you can hold foreign currency and convert in tranches. This is a currency decision, not a tax one, but on a six-figure inheritance the FX spread alone can be meaningful.
- The transfer itself. Wire from the estate or your home-country account to your Israeli bank, or route through a regulated money-transfer service for a better rate than a bank wire. Either way, the source-of-funds paperwork in point 1 is what unblocks the deposit.
Comparing the Two Sides at a Glance
| Question | Israeli side (you, the oleh heir) | Home-country / cross-border side |
|---|---|---|
| Tax on receiving the inheritance? | None. No Israeli estate or inheritance tax7. | Estate tax (if any) is the estate's liability, paid by the executor before distribution56. |
| Cost basis of inherited assets? | Carryover basis (original purchase price of the deceased). | US: stepped up to date-of-death fair market value3. |
| Information reporting? | No special Israeli inheritance return for the heir. | US person: Form 3520 if a foreign bequest exceeds $100,000 in the year1. |
| Inherited a pooled fund? | Receiving it is not Israeli-taxable. | US person: it is a PFIC; Form 8621 and the section 1291 regime apply4. |
Israel charges nothing when you inherit from abroad: there is no Israeli estate tax and no inheritance tax, so you receive it free of any Israeli charge on the inheritance itself. Any US estate tax or UK Inheritance Tax is the estate's liability, settled abroad by the executor before you get a penny. The live cross-border issues for an oleh are the US date-of-death basis step-up, Form 3520 reporting for US persons, the PFIC trap inside an inherited foreign fund, and your Israeli bank's source-of-funds checks.
No. Israel imposes no estate tax and no inheritance tax, so you receive the inheritance free of any Israeli charge on the inheritance itself. A separate question is what happens when you later sell an inherited asset, because Israel uses carryover basis for capital-gains purposes, but the act of receiving the inheritance is not taxed in Israel.
No. US estate tax and UK Inheritance Tax are charged on the estate and paid by the executor out of estate assets before anything is distributed to you. You receive a net distribution; the death tax, if any, was settled abroad before the money ever reached you.
Form 3520 is a US information return. A US person who receives more than $100,000 in a year from a foreign individual or estate must report it; it does not create a tax, but a late or missing filing can draw a penalty of up to 25% of the amount received. If you are a US citizen or green-card holder inheriting from abroad, check the threshold and file on time with your annual US return.
For US tax, inherited assets take a basis equal to their fair market value on the date of death. That can erase decades of built-in gain, so if you sell soon after inheriting, your US capital gain is small. Israel does not grant this step-up, it uses carryover basis from the deceased’s original purchase price, so plan a sale of inherited assets with both systems in view.
For a US person, yes, it needs care: a non-US pooled fund is a PFIC, with punitive default taxation under section 1291 and a Form 8621 filing obligation. Cash inheritances are simple; inherited foreign funds are not. Speak to a cross-border professional before you sell or keep it.
Expect source-of-funds documentation for a large incoming transfer: a death certificate, the will or probate/grant, and a statement showing the funds came from the estate. Israeli banks run anti-money-laundering checks on big deposits, so gather these before you transfer to avoid the money being held pending review.
