Determining the estate duty liability in your estate is a critical part of the planning process as it allows the estate planner to put mechanisms in place to address any shortfalls that may exist. Estate Duty effectively taxes the transfer of wealth from the deceased’s estate to the beneficiaries, keeping in mind that in our country no tax is payable by a beneficiary on assets received as an inheritance.
Estate duty, which is levied in terms of the Estate Duty Act 1955, is payable at a flat rate of 20% on the net value of a deceased estate up to R30 million, and at a flat rate of 25% to the extent that the value exceeds R30 million. The dutiable value of a deceased estate is calculated by adding the value of the deceased’s property, deducting allowable expenses, and then deducting the Section 4A rebate to arrive at a net value – bearing in mind that the deceased estate of a person ordinarily resident in South Africa includes their worldwide assets. Where the deceased was not ordinarily resident for tax purposes in South Africa at the time of death, any foreign assets are excluded from the dutiable estate.
Let’s break the calculation down:
Property in the deceased estate
In terms of Section 3(2) of the Act, estate duty is calculated on the value of all property including movable and immoveable property as well as corporeal and incorporeal property. Corporeal property refers to physical, tangible property such as a vehicle or fixed property – in other words, the right of ownership in a material thing, including real and personal rights, such as a usufruct over a property. It also includes incorporeal property which is the right to ownership of an intangible asset protected by law, such as copyrights, trademarks or intellectual property.
Deemed property in the deceased estate
Deemed property refers to property that did not exist prior to the deceased’s passing but which arose as a result of his or her death, such as the proceeds of domestic policies on the deceased’s life, certain donations, and accrual claims on behalf of the deceased against the estate of the surviving spouse. Where no beneficiary has been nominated on a living annuity, the proceeds will be paid into the deceased’s estate and will be estate dutiable. In determining what does and what does not qualify for deemed property, take note of the following:
- The proceeds of domestic insurance policies taken out on your life, although keep in mind that if the proceeds are payable to your spouse in terms of a registered ant-nuptial contract are excluded for estate duty purposes.
- The proceeds of buy-and-sell policies that are paid to a business partner of the deceased for the purposes of funding the purchase of shares from the deceased do not form part of the deceased’s dutiable estate, provided that the policy conforms to the conditions of the act.
- Any benefits payable by an approved retirement fund, including pension, provident, preservation and retirement annuity funds as a result of your death are not considered deemed property in your estate.
- If you are married with the accrual system, any amount owing to your estate in respect of an accrual claim is considered property in your deceased estate.
- Where you make donations which arise as a result of your death – referred to as a donatio mortis causa – the donation is exempt from donations tax although the value will be included for estate duty purposes. To qualify as a donatio mortis causa, the transfer of ownership must be contingent on your death, executed in terms of your will, and accepted by the donee before your death.
- Any assets held in trust – whether inter vivos or mortis causa – do not fall into the estate of the deceased and do not attract estate duty. As such, trusts can make excellent estate planning tools, especially to house growth assets intended for use by subsequent generations.
The impact of your marital regime
The deceased’s marital regime will have a direct bearing on the distribution of the assets and therefore on the estate duty calculation.
The matrimonial property regime under which a person is married will impact the estate duty calculation. Where a couple is married in community of property there is only one estate. This means that should one spouse die, the entire estate must be wound up following which the surviving spouse has a 50% claim to her share of the joint estate. Funeral costs and estate duty are paid for from the deceased’s share of the joint estate. Where a couple is married with the accrual system, the spouse with the smaller accrual has a claim against the other spouse’s estate. This means that if the first-dying spouse has the smaller accrual, her estate will have a claim against the surviving spouse’s estate for her share of the accrual. This accrual claim is considered deemed property in the deceased’s estate and is dutiable.
As an ordinary resident of South Africa, the Act makes provision for the value of certain assets to be deducted from the estate of the deceased before levying estate duty:
- Section 4(a): The cost of funeral, tombstone, and deathbed expenses, including doctor’s fees, burial and cremation costs, as well as death notice advertisements, although keep in mind that these costs must be deemed reasonable, failing which SARS will not permit them to be deducted.
- Section 4(b): Debts owed in South Africa, including any taxes owing to SARS, including income tax and capital gains tax.
- Section 4(c) and (d): The costs of administration, including executor’s fees, Master’s fees, bank costs on the estate late bank account, newspaper advertisement costs, transfer and bond cancellation costs, and valuation costs.
- Section 4(h): Bequests made to certain public benefit organisations which are approved in terms of Section 18A of the Income Tax Act.
- Section 4(q) deduction: In terms of this section of the Estate Duty Act, no estate duty is payable on the value of the assets bequeathed to your surviving spouse but will be postponed until the death of the second-dying spouse. This deduction extends to the proceeds of domestic life policies that are payable to your surviving spouse.
- Other: Other deductions may include valuation fees, bequests to qualifying Public Benefit Organisations, claims in terms of the Matrimonial Property Act, fees on transfer of property to a surviving spouse, and assets inherited by the surviving spouse.
Section 4A abatement
Once the net value of the estate has been determined, the R3.5 million abatement provided in terms of Section 4A of the Estate Duty Act should be applied. In terms of this section, estate duty will only be charged on the net value of the estate that exceeds this abatement. In the event of the first-dying spouse, this abatement can be rolled over to the surviving spouse who will then have up to R7 million abatement in the event of his/her death – which means that the first R7 million of their estate will be free from estate duty. To qualify for this abatement, couples must qualify as spouses in terms of the Act with the definition including those in a recognised marriage or customary union, religious marriages, and those married in terms of the Civil Union Act including same-sex or heterosexual unions that the Commissioner is satisfied is intended by be permanent. Once the abatement has been applied, the dutiable value of the estate will be arrived at and, under the value of R30 million, will be taxed at the flat rate of 20%.
As is evident from the above, estate duty can have a significant bearing on the value of the estate left for distribution amongst one’s heirs. One of the primary functions of estate planning is to reduce the amount of tax that one’s deceased estate is liable for to ensure that your financial legacy can be maximised.
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