Understanding what taxes your deceased estate will be liable for is a critical part of the estate planning process and failing to account for your tax liabilities can detrimentally affect the liquidity in your estate and, in turn, the financial legacy to your loved ones. In terms of our legislation, those that inherit from a deceased estate are not liable to pay tax on the asset. An inherited asset is a capital receipt and is not included in the taxpayer’s gross income. Thus, while no inheritance tax is payable by the person receiving the inheritance but rather by the deceased estate. The deceased must therefore factor into account several potential liabilities which may include:
Estate duty is essentially inheritance tax payable by the deceased’s estate for the transference of assets from his estate to his heirs or beneficiaries. In accordance with Section 4A of the Estate Duty Act, an abatement of R3.5 million will be deducted from the net value of your deceased estate meaning that an amount equal to this rebate will not be subject to estate duty. If you are married, you are able to roll your R3.5 million abatement over to your surviving spouse who will then have an effective R7 million abatement in the event of her passing should your spouse be the sole beneficiary of the estate. As it currently stands, your estate will be liable for estate duty to the extent that the net value of your estate exceeds this abatement at a flat rate of 20% on the first R30 million. Thereafter, estate duty will be levied at a rate of 25%. One of the key functions of your executor will be to calculate your estate duty liability which he will effectively do by adding up the value of your property and deemed property, and then deducting the allowable expenses and exclusions as set out in the Act. Remember, when calculating the value of your estate, your executor is required to take into account those assets situated in both South Africa and abroad. In the context of the Act, property is a broad term that includes movable and immoveable property, corporeal and incorporeal property, and personal rights such as servitudes over a property. It also includes deemed property such as the proceeds of domestic life policies, subject to several exceptions, and accrual claims against your surviving spouse’s estate. From the value of your gross property, your executor will be entitled to make certain allowable deductions which are set out in Section 4 of the Act, including funeral, tombstone and deathbed expenses, the costs of administration, and debt. Once the net value of your estate is established, your executor can deduct the above-mentioned Section 4A abatement to determine the dutiable amount of the estate.
Keeping in mind that your tax commitments follow you to the grave, one of the primary functions of your executor will be to settle your tax affairs with SARS including any previous tax years where your affairs are not in order. For income tax purposes, your worldwide income will be subject to income tax in South Africa. Remember, with effect from 2016, your executor will be required to file a pre-date of death assessment as well as a post-date of death assessment. The pre-date of death assessment will include all dividends, interest and rental income earned by your estate up until the expiration of the liquidation and distribution account advertisement. Any income earned by your deceased estate thereafter up until the finalisation of your estate must be filed in your post-date assessment. In determining the income tax payable by your estate your executor must take into account all local and foreign income, investment and rental income, income generated through trading and farming, as well as trust income. Professional accounting fees incurred by your deceased estate in completing your income tax returns can be considered an allowable deduction.
Capital Gains Tax
Capital gains tax is another form of tax that must be taken into consideration when considering the liabilities in your deceased estate because, importantly, your death will trigger a capital gains event. In the event of your passing, you will be deemed to have disposed of your assets for an amount equal to their market value on the date of your death. Remember, capital gains tax is charged on the gains made from the sale or transfer of an asset that is deemed to have taken place on your death. Regardless of whether you die with a valid Will in place, or whether the laws of intestacy apply, the bottom line is that your assets will be transferred to another person upon your death which, in turn, gives rise to capital gains event. Remember, CGT is regulated by the Income Tax Act and all tax owing to SARS by your deceased estate must be paid before the executor can distribute any inheritance to your heirs. That said, Section 4 of the Estate Duty Act makes it clear that any debt owing in your estate – including any debt owing to SARS – is deductible for estate duty purposes. The Income Tax Act makes provision for a once-off CGT exclusion of R300 000 in the year of your passing, which means that the first R300 000 of gain realised in your deceased estate will not be taxed. Any gains realised above R300 000 will be included for CGT purposes at a rate of 40% and will be taxed at your marginal tax rate, subject to certain exclusions. For instance, any assets that you bequeath to your surviving spouse will be excluded for CGT purposes, as well as the first R2 million gain on the sale of your primary residence. Similarly, personal use assets such as cash, retirement funds, and motor vehicles are also excluded for CGT purposes.
Keep in mind that your executor will effectively be your representative when it comes to finalising the tax affairs of your estate and, as is evident from the above, this can be a complex process. Our advice is to undertake a careful tax planning exercise as part of your estate planning to ensure that your executor is not unnecessarily burdened with incomplete tax affairs and complications.
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