Estate Taxes: Income Tax, Tax Return and Deductions

The deceased's final tax return

When a person dies, the taxation for their year of death is handled through the normal taxation process. For the year of death, the estate is taxed on both the deceased's and the estate's income, applying the provisions of the Income Tax Act that would have applied to the deceased (Income Tax Act, section 17(1)).

Pre-completed tax return

The Tax Administration sends the estate's pre-completed tax return to one shareholder listed in the estate inventory deed or, if the estate has authorised a representative, to the representative. The return shows:

• Wages and pensions up to the date of death
• Capital income (dividends, interest, rental income)
• Prepaid taxes
• Information reported by the employer

Checking and supplementing

It is the responsibility of the estate administrator or shareholders to:

• Check the accuracy of the pre-completed information
• Add any missing income (for example, rental income, capital gains)
• Report deductions (e.g. travel costs, income-earning expenses, household deduction)
• Correct any errors and return the declaration by the deadline

Division of income in the year of death

There are no two separate assessments for the year of death. The deceased's income up to the date of death and the estate's income after it are combined and taxed in the year-of-death taxation under the rules that would have applied to the deceased. The estate is taxed as its own, separate taxpayer from the year following the year of death.

One exception concerns sales of assets: if the estate sells property in the year of death after the death, the inheritance tax value is used as the acquisition cost and the holding period is counted from the time of death.

Estate income tax

After the year of death, the estate is an independent taxpayer. It receives its own tax decision and pays tax on the income it receives.

Taxable income

The estate is taxed on income it receives:

• Rental income from properties and real estate owned by the estate
• Dividend income from shares and funds
• Interest income from deposits and loans
• Capital gains from the sale of assets
• Forestry income from forests owned by the estate

Tax rates

The estate's earned income is taxed progressively, as for an individual. Capital income is taxed at the capital income tax rate:

• 30% on capital income up to EUR 30,000
• 34% on the amount exceeding this

Special features of an undivided estate

An undivided estate can be a tax-efficient structure:

• The estate is a separate taxpayer, so income does not accrue to the shareholders' income
• The progression of earned income is calculated separately
• The estate has its own deductions and income-earning expenses
• On the other hand, maintaining the estate incurs administrative costs

Taxation of an undivided estate

Under section 17 of the Income Tax Act (tuloverolaki), a death estate is taxed as a separate taxpayer. This separate tax liability continues as long as the estate is undivided and ends only when the estate is finally distributed. A shareholder's share of the estate's income is not taxable income for the shareholder, so the income of an undivided estate is taxed in the estate's name, not in the shareholders'.

The year of death and the following years

• Year of death: the estate is taxed on the deceased's and the estate's income together, under the same rules that would have applied to the deceased.
• After the year of death: the undivided estate is a taxpayer of its own and receives its own tax decision. Its capital income (e.g. rent, dividends, capital gains, forestry capital income) is taxed at 30%, and at 34% on the part exceeding EUR 30,000.
• Business activity: if the estate carries on a business, it is taxed as a separate taxpayer only for the three years following the year of death. After that, the estate is taxed as a partnership (yhtymä), and the business result is divided among the shareholders for taxation. The three-year rule applies only to estates carrying on a business – if the estate only has, for example, rental, forestry or investment income, that income is taxed in the estate's name for as long as it remains undivided.

The estate's tax return

The estate receives a pre-completed tax return every spring until it is terminated. The return is sent to one shareholder listed in the estate inventory deed or to an authorised representative, and the shareholders are jointly responsible for checking it. Most estates can correct the return only on paper forms; correcting it in MyTax (OmaVero) is possible only if the estate has a business ID (Y-tunnus) and the representative has a Suomi.fi authorisation.

If the estate carries on agriculture, forestry or a business, the shareholders must also, on their own initiative and by the deadline, file the same returns the deceased filed while alive: the agriculture, forestry and business tax returns (form 5) and, where applicable, VAT returns. One return is filed in the estate's name regardless of the number of shareholders.

If the estate owns a rental property

Rental income from a flat or property owned by the estate is the estate's income. The estate must apply for prepayment tax on the rental income, pay it, and check the following spring that the rental income is correctly shown on the estate's pre-completed return. Rental income is reported on forms 7H (housing company shares), 7K (real property) or 7L (other property). If the rental property passes to an heir in the distribution, the new owner reports the rental income in their own taxation from then on.

The estate also pays the real estate tax on properties belonging to it.

If the estate owns forest or a farm

• Forest: the estate is taxed on the deceased's forests and the surviving spouse on their own forests, and each files its own forestry tax return. If the estate and the spouse own forest together, they form a forestry partnership (metsäyhtymä) that files the return. A partnership is also formed if a forest property is divided in the distribution among several heirs in fractional shares.
• Farm: if the deceased owned a farm alone or together with their spouse, the estate files the agriculture tax return until the division of matrimonial property and the distribution of the estate have been completed. An agricultural partnership is formed if the farm includes property owned solely by the surviving spouse, such as fields.

When does the estate's tax liability end?

According to the Tax Administration, an estate ceases to exist for tax purposes when its assets have been distributed, a copy of the deed of distribution has been submitted to the Tax Administration, and a tax year has passed in which the estate no longer had any income or assets. The Tax Administration removes the estate from its register on its own initiative.

Sources: Income Tax Act, section 17, Tax Administration – Handling the taxes of a death estate, Tax Administration – Kuolinpesän vuokratulot (in Finnish), Tax Administration – Kuolinpesä maatalouden, metsätalouden tai elinkeinotoiminnan harjoittajana (in Finnish), Tax Administration – Distribution of estate.

Deadlines and schedules

Certain deadlines must be observed in estate taxation.

The deceased's final tax return

• The pre-completed tax return arrives in the spring of the year following the year of death
• The return date is marked on the declaration (usually April–May)
• An extension can be requested from the Tax Administration for a justified reason

The estate's annual tax return

• The estate receives a pre-completed tax return annually
• The return must be checked and submitted according to normal taxation schedules
• If the estate carries on agriculture, forestry or business activities, the tax returns for these activities must be filed on the estate's own initiative by the deadline

Inheritance tax return

The inheritance tax return is a separate declaration that the Tax Administration receives through the estate inventory deed:

• The estate inventory deed is submitted to the Tax Administration within one month of the estate inventory
• The Tax Administration makes inheritance tax decisions based on the estate inventory deed
• Heirs receive their own inheritance tax decisions

Deductions and debts

There are several deduction possibilities in estate taxation.

Deductions for the deceased's final tax year

• Travel costs: commuting costs up to the date of death
• Income-earning expenses: e.g. professional literature and tools
• Household deduction: if the deceased used the service in the year of death

Estate deductions

The estate can deduct:

• Rental income costs: maintenance charges, repair costs, insurance
• Forestry expenses: forest management, timber harvesting, forest road maintenance
• Income-earning expenses: costs arising from the administration of assets
• Interest: interest on the estate's debts, with certain restrictions

What cannot be deducted

• Funeral costs are not deductible in income taxation
• Estate inventory costs are not deductible in income taxation
• Estate settlement costs are generally not deductible in income taxation

Treatment of debts

The deceased's debts reduce the value of the inheritance for inheritance tax purposes, but are not deductible in income taxation:

• Mortgages, consumer loans and other debts are recorded in the estate inventory deed
• Debts reduce the value of the assets on which inheritance tax is based
• If debts exceed assets, no inheritance tax is imposed

Estate capital gains

When the estate sells assets, capital income tax is payable on the capital gain.

Determination of the acquisition cost

The acquisition cost of inherited property is the value used in inheritance taxation (fair market value at the time of death). This is a significant difference:

• If the deceased purchased a property for EUR 50,000 and the value at the time of death is EUR 200,000, the acquisition cost is EUR 200,000
• This is called the inheritance taxation acquisition cost
• If the estate sells the property for EUR 210,000, the capital gain is only EUR 10,000

Deemed acquisition cost

Alternatively, the deemed acquisition cost can be used:

• 20% of the sale price if the ownership period is less than 10 years
• 40% of the sale price if the ownership period is at least 10 years
• The holding period is counted from the deceased's time of death – the deceased's own ownership period is not included

Primary residence capital gains tax relief

The tax exemption for the sale of one's own home applies to an estate only to a limited extent:

• The deceased's own period of ownership and residence is not counted in the heirs' favour
• When an undivided estate sells a home, the gain is tax-exempt only for the share of those heirs who have used it as their permanent home continuously for at least 2 years after the death
• If the deceased owned the home alone and no division of matrimonial property has been made, the surviving spouse's residence does not count here
• If the estate is divided before the sale, the exemption is determined separately for each shareholder

Practical steps

Immediately after death

1. Notify the bank and insurance companies of the death
2. Clarify the deceased's tax matters through MyTax or the tax office
3. Collect tax-related receipts and documents
4. Appoint an estate administrator to handle tax matters

In connection with the estate inventory

1. Compile all income information for the estate inventory deed
2. Clarify the deceased's debts and receivables
3. Submit the estate inventory deed to the Tax Administration within one month
4. Prepare for inheritance tax decisions

Checking the tax return

1. Wait for the pre-completed tax return in spring
2. Check income, deductions and prepaid taxes
3. Supplement missing information and correct errors
4. Return the declaration by the deadline
5. Keep receipts for at least 6 years

Annual tax return

If the estate remains undivided, a tax return must be filed every year:

• Report rental income, dividends and other income
• Make deductions correctly
• Pay any residual taxes on time
• Consider dividing the estate if there is no obstacle to doing so

Dealing with the Tax Administration

MyTax service

Electronic services for estates are still limited:

• In MyTax, the estate's pre-completed tax return can be checked and corrected only if the estate has a business ID and the representative has a Suomi.fi authorisation for the estate's tax matters
• Most estates correct their tax return using paper forms sent by post
• If the estate has not authorised a representative, the forms must be signed by all shareholders
• The shareholders can authorise a representative with a power of attorney (form 3630)

Visiting the tax office

Matters can be handled in person at a tax office:

• Bring a power of attorney or estate inventory deed as proof of the right to act on behalf of the estate
• Book an appointment in advance
• Tax advice is free of charge

Requesting a correction

If the tax decision is incorrect:

• A request for correction must be made within 3 years of the end of the tax year
• The correction is requested from the tax adjustment board
• A correction to inheritance taxation can be requested through the same procedure

Using a professional

Estate taxation can be complex. Using a professional is recommended especially when:

• The estate has significant assets or many types of income
• The estate has business activities or forest property
• There are disagreements among the shareholders
• The estate is selling real estate or securities

Read more about estate inventory taxation and estate inventory documents.