How UK Heirs Signed an Israeli Combination Deal Without Funding the Tax

Result: Four Kiryat Ono apartments secured on an inherited plot, with the NIS 965,000 betterment tax carried by the developer rather than the owners · Timeline: 5 months to signature, 34 months to delivery · Challenge: Israeli tax falls due at signature in a deal with no cash · Authority: Israel Tax Authority real estate taxation office · Financial Impact: NIS 965,000 of tax funded by the developer

Background

The plot was 640 square metres in Kiryat Ono, bought by a grandfather in 1968 and left untouched for half a century while the town grew around it. He died in 2019. His three grandchildren, two in Manchester and one in south London, registered the succession order and then did what most heirs of Israeli land do, which is nothing at all. In early 2026 a developer wrote to them with an offer: transfer 58% of the rights in the plot and receive four apartments in the ten-unit building he intended to put up on it, together with parking and storage.

On paper the arithmetic looked generous. The land was worth roughly NIS 7.2 million and the four finished apartments would be worth about NIS 8.4 million. The eldest sibling, an accountant, treated the offer as a windfall with no downside because no money was leaving anyone's pocket. That reading survived until the first meeting with Israeli counsel.

The Challenge

A combination transaction (עסקת קומבינציה, iska kombinatzia) is a barter, and Israeli tax law does not care that no cash moves. Consideration in kind is consideration, so transferring part of the land to a developer is a sale of a right in land and betterment tax (מס שבח, mas shevach) is charged on it. The taxable consideration is measured by the value of the construction services the developer will supply on the part the owners keep, which here came to NIS 4.9 million. The declaration is due to the Israel Tax Authority within 30 days of signature under Section 73 of the Real Estate Taxation Law 5723-1963, and the assessment machinery runs from that date rather than from the day anyone receives an apartment.

That produced the problem the siblings had not seen coming. Israeli tax in the high six figures, payable in shekels within weeks, on a transaction that would generate its first pound of value 34 months later. None of them held Israeli currency and none of them wanted to borrow against an English house to pay a tax on an Israeli barter.

The inherited acquisition date made it worse rather than better. Under the Real Estate Taxation Law an heir steps into the deceased's shoes, so the relevant acquisition date was the grandfather's 1968 purchase and not the 2019 death. Half a century of appreciation was inside the gain, and a substantial slice of it fell into the pre-2001 apportionment where the historic rates apply rather than the flat 25%. The assessment came out at NIS 965,000.

There was a second trap in the draft the developer's lawyer had sent. It was silent on who paid the betterment tax and silent on who funded the advance the purchaser is obliged to withhold. Silence in a combination agreement is never neutral, because the seller carries that tax by default. The mechanics of the whole structure are set out in our guide to combination deals on Israeli land for non-residents.

In Practice: Under Section 73 of the Real Estate Taxation Law 5723-1963, the declaration must reach the Israel Tax Authority real estate taxation office (misui mekarkein) within 30 days of signature, and the date of signature is the tax date regardless of when apartments are delivered. On a construction-services consideration valued at NIS 4,900,000, with an acquisition date inherited from a 1968 purchase, the betterment tax assessed at NIS 965,000. Assessments of this kind are finalised over 8 to 12 months, and interest and linkage run from the statutory payment date, not from the date the assessment is agreed.

What We Did

The first move was to price the offer properly before answering it, which meant building a full model of the Israeli tax, the VAT and the UK position before a single term was negotiated. The construction services carried VAT at 18%, close to NIS 880,000 on this deal, and a private landowner cannot reclaim it. Once that was in the model the apartments stopped looking like an NIS 8.4 million windfall and started looking like a commercial transaction with a real cost, which is the frame you want a client in before they start negotiating.

Then we went after the funding of the tax. Developers routinely agree to carry the betterment tax or to secure it, and they agree to it before signature and never afterwards. We negotiated three linked provisions. The developer undertook to pay the betterment tax assessed on the transaction directly to the Israel Tax Authority as an addition to the consideration. He also funded the Section 15(b) advance, which on land acquired before November 2001 runs at 15% of the consideration. And the entire obligation was backed by an autonomous bank guarantee, so a developer in difficulty could not turn a tax covenant into an unsecured promise.

Security on the apartments themselves was negotiated in parallel, because a landowner in a combination deal is not a buyer under the Sale (Apartments) (Assurance of Investments) Law and does not get its statutory protections automatically. We registered a caution (he'arat azhara) in the siblings' favour over the whole plot at the Land Registry (Tabu), obtained a written subordination from the developer's financing bank so it could not foreclose over the retained share, and imported the delay compensation formula from Section 5A of the Sale (Apartments) Law 5733-1973 into the contract by agreement, giving 1.5 times comparable market rent for the first eight months of any delay beyond 60 days and 1.25 times after that.

None of the three ever flew to Israel. Powers of attorney were notarised in Manchester and London and apostilled by the FCDO Legalisation Office at GBP 45 per document on the standard postal service, which took ten working days, and certified Hebrew translations were commissioned in Tel Aviv. Signature took place in our office on their behalf five months after the developer's first letter.

In Practice: Section 15(b) of the Real Estate Taxation Law 5723-1963 obliges the purchaser to withhold an advance on the seller's account, 15% of the consideration where the land was acquired before 7 November 2001 and 7.5% where it was acquired later. On a consideration of NIS 4,900,000 that advance was NIS 735,000, paid to the Israel Tax Authority and credited against the assessment. In a barter deal the contract has to say who provides that sum, and a developer who agrees to fund it before signature will refuse to discuss it afterwards, which typically costs another 4 to 8 weeks of negotiation and usually the money as well.

The Outcome

The declaration went in on day 22 after signature. The betterment tax of NIS 965,000 and the NIS 735,000 advance were both funded by the developer under the negotiated covenant, and the siblings paid nothing out of pocket at any stage of the Israeli process. Their four apartments are secured by a registered caution, a bank guarantee covering both completion and the tax undertaking, and a bank subordination, with delivery due 34 months from signature and a contractual compensation formula if it slips.

The United Kingdom side turned out to be the pleasant surprise. A disposal for UK capital gains tax purposes happens when the contract is made under section 28 of the Taxation of Chargeable Gains Act 1992, so the UK tax year was the same one, and the transfer of 58% of the rights was a part disposal apportioned under section 42. What differed was the base cost. Because they had acquired the plot on their grandfather's death, section 62 gave them its market value in 2019 rather than the 1968 figure Israel had insisted on, so the UK gain across the three of them was about GBP 186,000 after apportionment, against an Israeli gain running to the millions of shekels. Capital gains tax at 24%, after each sibling's GBP 3,000 annual exempt amount, came to a little under GBP 44,000 in total, and every pound of it was covered by credit relief for the Israeli betterment tax under the 1962 Convention as amended by the Protocol in force on 28 October 2019. The Israeli tax had been paid within weeks of signature, well before the self assessment returns for that year fell due on 31 January 2028, so the credit landed in the right year without any of the timing difficulty these deals often create.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. In a combination deal the tax date is the signature date. Model the Israeli tax, the VAT and your home-country position before you answer the developer's letter, because every term worth having is negotiated before signature and none of them afterwards.
2. A developer's draft that is silent on the betterment tax and the Section 15(b) advance is not a neutral document. The seller carries both by default, and the seller in a barter deal has no cash.
3. Take security for the tax covenant, not just for the apartments. An autonomous bank guarantee turns a promise from a company you cannot sue conveniently from abroad into an obligation of a bank.
4. Inherited Israeli land carries the deceased's acquisition date, not the date of death. A plot bought in the 1960s produces a very different Israeli assessment from the one a foreign accountant expects, and part of the gain is taxed at historic rates rather than at 25%.
5. The United Kingdom rebases on death and Israel does not. That mismatch usually means the Israeli tax exceeds the UK tax on the same disposal, so credit relief absorbs the UK liability, but it only works if the Israeli tax is actually paid in the right tax year.

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Facing a Similar Situation?

If an Israeli developer has approached you about an inherited plot, the offer letter is the moment your leverage is at its highest and your information at its lowest. Our guide to the UK-Israel tax treaty for British non-residents explains how the two systems interact on Israeli land.

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