"Buy, Borrow, Die" is a wealth preservation technique long associated with high net worth individuals in the United States. It rests on three steps. First, buy appreciating assets (real property, equities, operating companies) and hold them. Second, borrow against those assets rather than selling them, drawing on the value locked inside the portfolio without ever liquidating it. The instrument that makes this possible is the securities-backed line of credit (SBLOC), a revolving facility under which a private bank or broker extends credit secured by a pledge of the borrower's marketable securities. Rather than selling shares (and triggering tax) to raise cash, the principal pledges the portfolio, draws down a credit line at a fraction of the collateral's value, and uses the proceeds for consumption, reinvestment, or further acquisitions, while the pledged assets continue to appreciate in the owner's hands. Third, die holding the assets, so that they pass to heirs whose tax basis is reset to current value, erasing the unrealized gain that accumulated during the owner's lifetime.
In a realization-based tax system, gain on an asset is taxed only when the asset is sold, and the gain is measured as the excess of the selling price over the owner's *basis* (broadly, what the owner paid for it). An asset that doubles or triples in value carries a large unrealized gain, but that gain remains untaxed for as long as the owner holds the asset. A "step-up basis" at death resets that basis to the asset's fair market value as of the date of death. The lifetime appreciation is wiped off the slate: the heir inherits the asset as though purchased afresh at today's value, and the capital gains tax that would have been due on a lifetime sale simply never crystallises. The owner never sells during his lifetime (avoiding capital gains tax), funds liquidity by borrowing instead (which is not a taxable event), and transmits the appreciated asset at death with its gain extinguished by the step-up basis.
To illustrate, suppose an individual buys shares in a private company for PHP 10 million, and over two decades they grow to PHP 200 million. If he sells during his lifetime, he pays capital gains tax on the PHP 190 million gain. If instead he pledges the shares under an SBLOC and borrows, say, PHP 60 million against them, he receives that cash tax free (a loan is not income) and keeps the shares. On his death, the shares pass to his heirs at a stepped-up basis of PHP 200 million. The PHP 190 million of lifetime appreciation is never subjected to income or capital gains tax; the estate settles only the estate tax. Each move (hold, borrow, transmit) sidesteps a charge the others would have triggered.
The question is whether the same strategy is available under Philippine law. It is, with qualifications based on how the National Internal Revenue Code (NIRC) taxes different asset classes.
Philippine income tax, like its American counterpart, is a realization-based system. Appreciation in the value of an asset is not income until a sale or other disposition occurs. A principal who acquires shares, land, or a closely held company and simply holds them recognises no gain, however much the asset climbs in value.
Proceeds of a loan are not income to the borrower. They represent an obligation to repay, not an accession to wealth, and so fall outside the definition of gross income under Section 32 of the NIRC. A principal may therefore pledge appreciated assets, draw down liquidity, and deploy that cash, all without recognising taxable gain on the underlying assets.
The securities-backed line of credit is the operative tool. An SBLOC is a revolving credit facility secured by a pledge of the borrower's investment portfolio (listed equities, bonds, funds, and similar liquid securities). The lender advances a percentage of the portfolio's market value, the advance rate, which varies with the volatility and quality of the collateral, and the borrower may draw and repay against the line as needed, paying interest only on amounts actually drawn. The pledged securities remain the borrower's property; they continue to appreciate and to pay dividends or interest to the owner, even while serving as collateral. Crucially, because the principal borrows rather than sells, no disposition occurs, and no capital gains tax is triggered, however large the embedded gain on the pledged portfolio.
In the Philippines, this service is delivered through the private banking and wealth management desks of the larger universal banks and through securities firms offering margin and collateralised lending. A concentrated equity position, a holding company's listed shares, or a diversified securities portfolio can each be pledged to release cash, leaving the asset (and its deferred gain) intact in the owner's hands.
The principal should be alert to the commercial risks that attend any SBLOC, chiefly the maintenance margin: if the collateral's value falls below the agreed threshold, the lender may issue a margin call requiring additional collateral or partial repayment, and in a forced sale scenario the very capital gains tax the structure was meant to defer could be triggered involuntarily. Prudent loan to value ratios and diversified collateral mitigate this exposure.
Section 40(B)(2) of the NIRC fixes the basis of property acquired by inheritance at *the fair market value as of the moment of death of the decedent*, not the decedent's historical cost. This is the Philippine equivalent of the American stepped-up basis under IRC Section 1014.
Returning to our illustration: the principal acquired his shares for PHP 10 million, and they are worth PHP 200 million at death. The PHP 190 million of appreciation accumulated over his lifetime is never subjected to income tax or capital gains tax. When the heirs take the shares, their basis is reset to PHP 200 million. Should they later sell at that figure, the gain for capital gains tax purposes is zero. Had the principal sold the same shares the day before his death, he would have faced capital gains tax on the entire PHP 190 million; transmission at death, by contrast, erases it.
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*This is for general information and does not constitute legal or tax advice. Geronimo Law is a full-service firm advising on taxation, banking and finance, and corporate transactions, among others.*
