THE IMPORTANCE OF ESTATE PLANNING
Tax Implications on Deceased Estates: Understanding the Impact
In South Africa, residents are well aware of the inevitability of taxes, power outages, death, and more taxes. Just like death itself, taxes cannot be avoided.
It is crucial to comprehend the various taxes applicable to a deceased estate and the person passing away.
By understanding these taxes, proper planning and consideration can be given to ensure that the inheritance left to heirs and legatees remains intact, without being significantly diminished to settle tax liabilities.
The Three Key Taxes:
When it comes to deceased estates, three taxes are almost always applicable:
- Income Tax:
Income tax is levied by the South African Revenue Service (SARS) on all the income earned by a person during the tax year in which they pass away (from 1 March to 28 February). This includes salary, rental income, business income, and investment income. The deceased estate, as the taxpayer, is also liable for income tax on the various types of income earned from the date of the deceased's passing until the estate is finalized, approved by the Master of the High Court, and properly wound up.
- Capital Gains Tax (CGT):
CGT is levied by SARS on the date of the deceased's passing, effectively taxing the growth in value of all capital assets held at that date. These assets include property and financial assets such as shares and unit trusts. CGT arises in a deceased estate because, according to the Income Tax Act, death is considered a CGT event. A deceased person is deemed to have disposed of their assets for an amount equal to the market value of those assets on the date of death.
- Estate Duty:
Estate duty is levied on the assets of deceased individuals who resided in South Africa at the time of their death, regardless of their citizenship. It also applies to the South African assets of deceased individuals who lived abroad. Estate duty is a tax on the transfer of wealth from one generation to the next.
Understanding the Relationship between Income Tax and Capital Gains Tax:
The tax return of the deceased includes any income earned or received during the tax year in which they passed away. In the final tax return submitted to SARS, they can utilize the annual interest exemption of R23,800 (R34,500 if older than 65) against all interest income earned. They are also entitled to primary, secondary, and tertiary tax rebates, the utilization of which depends on their age.
Capital gains tax applies to all capital assets held at the date of death.
The passing of an individual is seen as a deemed disposal, where the person is deemed to have disposed of their assets to their spouse, children, corporate entities, public benefit organizations, or the estate itself. The tax due is calculated based on the market value of the assets, subtracting the acquisition costs. The resulting net gain or loss on the deemed disposals is reduced by R300,000 (the capital gains tax exemption), and the final gain is taxed according to the applicable tax bracket. It is important to note that the R300,000 exemption is only available on the date of death, while the annual amount available is R40,000.
Certain assets in the deceased's final tax return are excluded from CGT, including assets accruing to a surviving spouse, most personal use assets, assets bequeathed to approved Public Benefit Organizations, and proceeds from life insurance policies. Additionally, the Income Tax Act excludes the first R2 million gain on the disposal of a primary residence.
Estate Duty and the Calculation of the Dutiable Estate
When an individual passes away, their assets are transferred to their beneficiaries according to their will or the rules of intestate succession. In either case, the South African Revenue Service (SARS) imposes estate duty on the estate. The estate duty rate is 20% on the first R30 million and 25% on any amount exceeding R30 million.
To determine the estate duty, the appointed executor must assess the dutiable estate. The executor calculates the value of all assets in the estate and makes deductions and exemptions allowed by the Estate Duty Act to arrive at the net dutiable estate. This net dutiable estate is subject to the aforementioned estate duty rates.
Certain assets are excluded from the dutiable estate calculation, including but not limited to assets given to the surviving spouse, assets bequeathed to approved Public Benefit Organisations, and living or life annuities with nominated beneficiaries. These proceeds are directly paid to the beneficiaries and are not subject to estate duty.
The dutiable estate is further reduced by allowable deductions, which may include the following:
1. Funeral costs and deathbed expenses.
2. Liabilities of the deceased at the time of death, including capital gains tax.
3. Estate administration costs.
4. Valuation fees.
5. Transfer fees for property transferred to a surviving spouse.
The final deduction against the dutiable estate is the section 4A abatement provided by the Estate Duty Act. This abatement considers R3,500,000 of the estate's net value as non-taxable for estate duty purposes. The abatement can be wholly or partially transferred to the surviving spouse, granting them an abatement of R7,000,000 (or a portion thereof if rolled over) upon their passing.
Addressing these four certainties or adequately planning for them while alive can ensure peace of mind for those left behind and prevent passing on the tax implications triggered by death to future generations.
The assistance of an attorney is essential when planning your estate.
NSV Attorneys can provide you with specialised knowledge, uphold professional standards, create customised solutions, provide personal attention and offer continued support
By contacting our team, you can ensure that your estate plan is comprehensive, legally sound and in line with your wishes.
Contact
JACK VAN ZYL
021 870 1185
JOHAN SLABBER
021 914 4481
