Understanding what taxes your deceased estate may be liable for is a critical part of the estate planning process. Failing to account for these liabilities can negatively impact liquidity in your estate and, in turn, reduce the financial legacy left to your loved ones. In terms of South African legislation, those who inherit from a deceased estate are not liable to pay tax on the inheritance. An inherited asset is classified as a capital receipt and is not included in the heir’s gross income. Therefore, no inheritance tax is payable by the person receiving the inheritance—but rather, the liability lies with the deceased’s estate. It is the deceased’s responsibility, through proper planning, to account for the following possible tax obligations:
Estate Duty
Estate duty functions as a form of inheritance tax paid by the estate on the transfer of assets to heirs or beneficiaries. In terms of Section 4A of the Estate Duty Act, an abatement of R3.5 million is deducted from the net value of the estate, meaning this portion will not be subject to estate duty. If the deceased was married, this abatement may be rolled over to the surviving spouse, effectively allowing a combined R7 million exemption.
As it currently stands, the estate is liable for estate duty on any value exceeding this abatement at a flat rate of 20% for the first R30 million, with a rate of 25% applying to the portion above R30 million.
One of the key duties of the executor is to calculate the estate duty payable by assessing the value of the estate’s property and deemed property, and then deducting allowable expenses and exclusions as outlined in the Act. For purposes of this calculation, both South African and foreign assets must be included.
The term ‘property’ is broadly defined in the Estate Duty Act to include movable and immovable property, corporeal and incorporeal property, and personal rights such as usufructs or servitudes. It also includes deemed property such as the proceeds of life insurance policies (subject to certain exceptions) and accrual claims against the surviving spouse’s estate.
From the value of this gross property, the executor can deduct allowable expenses in terms of Section 4 of the Act, which include administration costs, funeral and tombstone expenses, debt, and deathbed expenses. Once the net value is calculated, the Section 4A abatement is applied to determine the dutiable portion of the estate.
Income Tax
It’s important to remember that your tax obligations do not end at death. One of the executor’s primary responsibilities is to settle any outstanding tax obligations with SARS, including unresolved returns from previous tax years. For income tax purposes, a deceased estate is liable for tax on worldwide income earned prior to and after the date of death.
Since March 2016, SARS has required executors to submit two separate assessments: a pre-date of death assessment and a post-date of death assessment. The pre-date assessment includes all income earned by the deceased up until the date of death, including interest, dividends, and rental income. The post-date assessment covers all income earned by the deceased estate from the date of death until the date of final distribution or the conclusion of the liquidation and distribution account.
The executor must include in the deceased estate’s income tax return all local and foreign income, rental and investment income, trust income, and any income generated through business, farming, or trading activities. Accounting fees incurred by the estate to finalise the tax returns are deductible expenses. This can reduce the estate’s overall taxable income and should be factored into liquidity calculations.
Capital Gains Tax (CGT)
Capital gains tax is an often-overlooked liability that can significantly affect the financial position of the estate. Death is regarded as a deemed disposal for CGT purposes, meaning that upon death, the deceased is considered to have disposed of all capital assets at their market value on the date of death. This deemed disposal triggers a capital gain (or loss), which must be declared and settled by the estate.
CGT is charged on the capital gains realised from this notional sale, regardless of whether you die testate (with a Will) or intestate (without a Will). Since the assets are transferred to another person, the capital gains event arises automatically.
CGT is governed by the Income Tax Act and must be settled by the executor before the estate can be finalised or inheritances distributed. Importantly, Section 4 of the Estate Duty Act allows debts, such as outstanding CGT—to be deducted when calculating estate duty. In the year of death, a once-off CGT exclusion of R300 000 is available, meaning that the first R300 000 in capital gains is excluded from taxation, and any gains above this threshold will be taxed at 40% of the gain and will be taxed at the deceased’s marginal tax rate, subject to certain exclusions. With this in mind, there are several exclusions worth mentioning:
- Assets bequeathed to a surviving spouse are excluded from CGT due to the rollover relief granted under Section 25(4) of the Income Tax Act.
- The first R2 million of gain on the sale of a primary residence is excluded for CGT purposes.
- Retirement fund interests, personal-use assets (such as household goods, motor vehicles), and cash are excluded from CGT.
It is important to keep in mind that foreign-domiciled assets may attract additional tax reporting requirements, and it is important to take these into account when planning your estate. If the deceased held offshore investments such as foreign shares or property, these may trigger reporting obligations under South Africa’s Common Reporting Standard (CRS) agreements, while some assets may be subject to foreign estate or inheritance taxes.
Your executor acts as your legal representative in all dealings with SARS, and as is clear from the above, finalising the tax affairs of a deceased estate is a complex and highly regulated process. With this in mind, be cognizant of the fact that poor planning or incomplete record-keeping can delay the winding-up process and diminish the value of your estate.
Our advice is to incorporate detailed tax planning into your broader estate planning process. Ensuring that your tax affairs are in order during your lifetime, and that you maintain up-to-date records, will significantly ease the administrative burden on your executor—and help preserve your legacy for the next generation.
Have a great day.
Sue
