Death and Taxes

DEATH AND TAXES

This article explores on a very high-level basis the Estate Duty System in South Africa. The Estate Duty and Donations Tax provisions have, to some extent, been aligned to reduce or eliminate arbitrage between these two tax instruments.

Estate Duty Calculation

Estate Duty is payable at 20% on an estate of a person who dies and whose Net Estate exceeds R3.5 million. Estate duty is levied on property of residents and South African property of non-residents less certain deductions. The duty is levied on the dutiable value of an estate at 20% on the first R30 million and at 25% above R30 million. A deduction of R3.5 million, deductions for liabilities, bequests to PBOs, and property accruing to surviving spouses are allowed as deductions in calculating estate duty, in short:

 

Gross Value of Deceased Estate: Property and Deemed Property at Date of Death               R xxx

Less: Allowable Deductions                                                                                                  R xxx

Net Value                                                                                                                            R xxx

Less: Abatement                                                                                                                R 3.5m

Dutiable Amount                                                                                                                R xxx

Estate Duty                                                                                                                        R xxx

Less: Tax Rebates                                                                                                             R xxx

Less: Estate Duty recoverable from Beneficiaries (if applicable)                                             R xxx

Estate Duty Payable                                                                                                          R xxx

 

The deceased person is taxed on income received or accrued until date of death, and is administered by the executor or administrator as the deceased’s representative taxpayer. Following date of death, the deceased estate comes into existence for legal and tax purposes. The deceased estate holds the assets of the deceased person until the liquidation and distribution account has been inspected and become final under the Administration of Estates Act. The, assets are then handed to the heirs or delivered to the trustees, if applicable. Income, which accrues to the estate after death but before distribution to the beneficiaries, is dealt with under the Income Tax Act. The estate of a deceased person is subject to 20% Estate Duty on the first R30 million of the Dutiable Amount and 25% above that figure, after deducting R3.5 million against the Net Value. For example, if the Net Value is R10 million, Estate Duty will be subject to 20% of the amount exceeding R3.5 million which amounts to R1 300 000 (20% of R6.5m).  The Executor is generally required to pay the duty. In certain instances, estate duty is payable directly by the person receiving the property. For example, if a policy is payable directly to a beneficiary, the Executor must recover this estate duty from the beneficiary (which will not be paid by the estate).

Dutiable Amount of an Estate

The dutiable amount of a deceased estate is determined by deducting from the Net Value, certain permissible deductions, and an Abatement of R3,5 million.

Marriages Subject to Accrual System

Marriages out of community of property in terms of an antenuptial contract which excludes community of property and community of profit and loss, is subject to the accrual system, except if the system is expressly excluded by the antenuptial contract. At the dissolution of a marriage subject to the accrual system, by death of one or both of the spouses, the spouse whose estate shows no accrual or a smaller accrual than the estate of the other, or the deceased estate, acquires a claim against the other spouse for an amount of half of the difference between the accrual of the respective estates of the spouses. The amount of a claim against an estate acquired under (section 3 of) the Matrimonial Property Act by the surviving spouse of the deceased or by the estate of his deceased spouse, in respect of an accrual contemplated in that section qualifies as a deduction for estate duty purposes.

Bequests to Surviving Spouse

One of the most common deductions against the Gross Value is bequests to the surviving spouse. The deduction must be reduced by amounts that the surviving spouse is required in terms of the will of the deceased to dispose of to any other person or trust. This deduction is also not available in respect of property that accrues to a trust established by the deceased for the benefit of the surviving spouse, if the trustee has a discretion to allocate the trust property or income to person/s other than the surviving spouse. The understanding and use of trusts in estate duty, as result, remains important.

Abatement

A deceased estate is allowed to deduct from the net estate value an Abatement of R3.5 million If the person was the spouse at the time of death of one or more previously deceased persons, the dutiable amount of that person must be determined by deducting from the net value of the estate, R3.5 million multiplied by two; and reduced by the amount deducted from the net value of the estate of any one of the previously deceased persons.

If a person was one of the spouses at the time of death of a previously deceased person, the dutiable amount of the estate of that person must be determined by deducting from the net value of the estate, the sum of R3.5 million, and R3.5 million divided by the number of spouses, reduced by an amount which is determined by dividing the amount deducted, from the net value of the estate of the previously deceased person by the number of spouses of that previously deceased person.

The amounts in the foregoing two paragraphs may not exceed R3.5 million. The foregoing paragraphs will also not apply unless the executor of the estate of that person submits, at the time and in the manner and form prescribed by the Commissioner, to the Commissioner a copy of a return submitted to the Commissioner or other relevant material that the Commissioner may regard as reasonable in respect of the estate of the previously deceased person.

Simultaneous Death

If a person and his or her spouse die simultaneously, the person with the smallest net estate value is deemed to have died immediately prior to the other spouse.

 

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Death and Taxes