In South Africa, like in most countries, death and taxes go together in the form of inheritance taxes. These are taxes that the deceased estate has to pay, in addition to the personal tax of the deceased person for their final tax year.
The personal tax is levied on the income the deceased person received before their death, during the course of the tax year, whereas the inheritance taxes are levied on what they leave behind in their Will.
Capital Legacy’s CEO, Alex Simeonides, answers 8 questions that delve into the intricacies of the two inheritance taxes we face: estate duty and capital gains tax.
1. Which taxes apply when someone dies?
Two separate taxes are levied on a deceased estate: one is Estate Duty and the other is Capital Gains Tax. Estate Duty taxes the transfer of wealth (assets) from the deceased’s estate to the beneficiaries. Capital Gains Tax is levied on any capital gain (profit) on the sale or transfer of an asset (which a deceased individual is considered to have done upon their death).
2. What is Estate Duty?
Estate Duty is a tax paid on the ‘dutiable estate’ of a deceased individual. It is charged at a rate of 20% on the first R30 million of the dutiable estate, and 25% on anything above R30 million.
The dutiable estate comprises all the deceased individual’s property (assets and liabilities), after the allowable deductions have been made (more about that later).
3. When is Estate Duty levied on an estate?
Estate duty is levied on the assets of deceased individuals who resided in South Africa at the time of their death (irrespective of their citizenship), and on the South African assets of deceased individuals who lived abroad.
Foreign property is considered in the calculation of the dutiable estate of an individual who resided in South Africa at the time of their death.
4. What deductions are allowed?
Allowable deductions which influence Estate Duty calculations include debts, funeral and death-bed expenses, administration costs, property transferred to a surviving spouse, and the first R3.5 million of the value of the estate.
The first R3.5 million of the value of an estate is not subject to Estate Duty. This allowance may be added to the allowance granted to the surviving spouse of a deceased person which amounts to a total of R7 million which is not subject to Estate Duty, upon the death of the second spouse.
Deductions are also allowed for liabilities, bequests made to qualifying public benefit organisations, and assets that are inherited by the surviving spouse.
5. What about Estate Duty on retirement planning?
If an individual died on or after 1 January 2009, any retirement annuity and pension or provident fund benefits (including lump-sums) are not considered as “property” and are therefore not subject to estate duty.
6. Explain how life insurance impacts Estate Duty.
When a life insurance policy is paid out, the value of the pay-out is included in the value of the deceased’s estate and it could therefore impact the amount on which the estate duty is levied.
There are certain exemptions, such as:
- When the policy falls outside of the estate in terms of an antenuptial contract.
- When the policy had been implemented and paid for by a business partner and the proceeds are then paid to the business partner on the death of the individual whose life had been insured.
- When the policy was not taken out by the deceased individual and will not be used to benefit a family member or business associate of the deceased.
The life insurance policies referred to above include policies where a spouse or child is nominated as a beneficiary, buy-and-sell policies, and key-person policies that conform to the conditions as set out in the Act. It is important to note that endowment policies (local and offshore) that do not pay out on the death of a life assured, but that are owned or part-owned by a deceased policyholder, will be subject to estate duty.
The surrender value of the policy must be included as property in the deceased estate.
7. What is Capital Gains Tax (CGT) and who has to pay it?
South African residents (living or deceased) have to pay CGT on the profit (capital gains) that is made when disposing of an asset. Non-residents are subject to CGT on capital gains arising from the disposal of immovable property or an interest in immovable property in South Africa.
The Income Tax Act declares that a deceased individual will be deemed to have disposed of their assets for an amount equal to the market value of the assets, on their date of death.
However, CGT is not a separate tax but forms part of Income Tax. The inclusion rate for CGT is 40% for individuals and deceased estates, and therefore the maximum effective rate of 18% would be levied.
8. Is any profit excluded from Capital Gains Tax?
There are some exclusions which apply to CGT. Any assets that go to the surviving spouse are exempt from CGT.
Furthermore, an exclusion of R300,000 is also applicable for the year in which the individual passed away.
Other basic exclusions include:
- The first R2 million profit on the disposal of a primary residence (such as your house).
- Most personal use assets (such as vehicles).
- Retirement benefits and payments from original long-term insurance policies.
- A small business exclusion of R1.8 million, when a small business with a market value not exceeding R10 million is disposed of (subject to certain qualifying criteria).