Deceased Estates and the various tax implications applicable on death

South African tax residents are certain of four things in life: taxes, loadshedding, death and more taxes. Taxes, like death, is unavoidable. It is of utmost importance that one understands the various taxes applicable to a deceased estate (and to a person passing away) to ensure proper planning and consideration is given to each, thereby ensuring that the inheritance bequeathed to heirs and legatees is not diminished to settle various tax liabilities.

Whilst an array of taxes may apply, the three taxes, almost always applicable, are:

• Income Tax;
• Capital Gains Tax; and
• Estate Duty.

Three taxes, but what is the difference?

Income tax is levied by the South African Revenue Service (“SARS”) on all the income earned by a person in the tax year (1 March to 28 February) of their passing, this includes, but is not limited to: salary, rental income, business income and investment income. The deceased estate in its capacity as a taxpayer will also be liable for income tax on the various types of income earned from the date of passing of the deceased up to the date the estate is finalized, approved by the Master of the High Court and duly wound up.

Capital Gains Tax or CGT is levied by SARS on the date of passing of the deceased, effectively taxing the growth in value of all capital assets held at said date; these assets include property and financial assets (shares, unit trusts, etc.). The reason that capital gains tax arises in a deceased estate is that, in terms of the Income Tax Act, death is a CGT event. The deceased person is deemed to have disposed of their assets for an amount equal to the market value of the assets on the date of death.

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. Estate duty taxes the transferal of wealth from one generation to the next.

A closer look at the relationship between income tax and capital gains tax

The tax return of the deceased will contain any income earned/received during the tax year they passed away in. In their final tax return submitted to SARS they are able to utilize the annual interest exemption of R23 800 (R34 500 if older than 65) against all interest income earned. They are further granted use of the primary, secondary and tertiary tax rebates, the use thereof being age-dependent.

Capital gains tax applies to all the capital assets held at the date of death,  The passing of an individual is seen as a deemed disposal, whereby the person effectively disposed of his/her assets to either his/her spouse, children, corporate entities, Public Benefit Organisations and/or finally the estate.

The tax due is calculated by obtaining the market value of the various assets, subtracting the costs incurred to acquire the assets, the sum thereof is reduced by R300 000 (the capital gains tax exemption) to provide a net gain or loss on the deemed disposals. The net gain is further reduced by 60% (the capital gains tax exclusion rate) and the final gain is then taxed in accordance with the relevant tax bracket applicable to the deceased. An important note, the R300 000 exemption is only available on the date of death, the annual amount available is R40 000.

Certain assets in a deceased’s final tax return are excluded from CGT, including assets accruing to a surviving spouse, most assets for personal use, assets bequeathed to approved Public Benefit Organisations, and the proceeds from life insurance policies. Further, the Income Tax Act excludes the first R2 million gain on the disposable of a primary residence.

Estate duty and the dutiable estate

When a person passes away, their assets will be transferred to their beneficiaries in terms of their will or intestate succession. Either way, SARS will levy estate duty at a rate of 20% on the first R30 million and  25% on any amount greater than R30 million.

In order to calculate estate duty, the executor of the state must determine the dutiable estate. The executor determines the estate by calculating the value of all the assets in the estate and reducing the value of the assets with various deductions and exemptions allowed by the Estate Duty Act to arrive at the net dutiable estate which is subject to the rates of estate duty discussed above.

Assets excluded from the dutiable estate calculation includes (but is not limited to): assets accruing to the deceased’s surviving spouse, assets bequeathed to approved Public Benefit Organisations and living or life annuities where a beneficiary (or beneficiaries) has been nominated by the deceased; these proceeds will be paid directly to the beneficiary and do not attract estate duty.

The dutiable estate is further reduced by the following allowable deductions, included but not limited to:

• Funeral costs and deathbed expenses,
• The liabilities of the deceased at the date of death, including capital gains tax that arises on death,
• Estate administration costs,
• Valuation fees and
• Fees on transfer of property to a surviving spouse.

The final deduction available against the dutiable estate is the section 4A abatement provided for by the Estate Duty Act. The abatement deems R3 500 000 of the estate’s net value as non-taxable for estate duty purposes. The abatement may be, wholly or partially, rolled over to the surviving spouse, granting said spouse an abatement of R7 000 000 (or part thereof as rolled over) on their passing.

Dealing with the four certainties or at least sufficiently providing for them whilst still alive can (and will) ensure peace of mind for those left behind and will ensure that the effect of the tax implications triggered at death, is not passed on to the following generation(s).