Finance Bill clarifies tax treatment of inherited property

ISLAMABAD: The Federal Government has introduced a significant relief measure in Finance Bill, 2026 addressing long-standing ambiguities in the determination of cost basis of inherited immovable property and the tax treatment of family settlements following the death of a person.

The amendment brings much-needed clarity to Section 79 of the Income Tax Ordinance, 2001, and is expected to ease the tax burden on families navigating property transfers after a death.

The determination of cost basis in cases of inherited immovable property has historically been a source of dispute between taxpayers and tax authorities. A particularly contentious area has been whether the transmission of assets through family settlements, arrived at amongst family members following the death of a person, qualifies under the same provisions governing inheritance transmission. In the absence of explicit legislative language, tax authorities frequently took a restrictive view, treating such family settlements as separate transactions liable to capital gains tax.

Through the Finance Bill, 2026, the Federal Government has inserted an Explanation in Section 79, sub-section (1), clause (b) of the Income Tax Ordinance, 2001. The explanation reads as: “For the removal of doubt it is clarified that transmission of an asset, in the nature of immovable property, to a beneficiary on the death of a person shall also include the transmission of assets by reason of family settlement amongst the family members consequent upon death of the person.”

The insertion of this explanation operates as a clarificatory provision, meaning it is declaratory of the law as it always stood, thereby providing retrospective comfort to taxpayers who may have faced adverse treatment in prior tax years.

This amendment is a welcome relief for families who, upon the death of a member, arrive at mutual arrangements regarding the distribution of immovable property rather than proceeding through formal succession or probate mechanisms. Such family settlements are a common and practical reality in Pakistan, yet their tax treatment remained uncertain.

Family settlements of immovable property consequent upon death will now be treated on par with direct inheritance transmission. The cost basis for the beneficiary will be determined in accordance with the inheritance provisions under Section 79, rather than being treated as a fresh acquisition at fair market value. Families will no longer face the risk of capital gains tax liability arising solely from the act of settling inherited property amongst themselves.

Copyright Business Recorder, 2026