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When planning your estate, understanding the tax implications on the value that is passed on to your heirs is crucial. For 60 plussers, it’s especially important to know how income tax and Capital Gains Tax (CGT) interact with estate duty calculations to avoid unnecessary surprises.

 

Discussed below are some considerations every person needs to take into account when planning their estate and drafting their Will.

What Is Estate Duty?

Estate duty is the tax levied on the estate of a deceased person, calculated on the net value of assets left behind. In South Africa, the Estate Duty Act governs this process, and the current estate duty rates are:

  • 20% on the net value of estates up to R30 million
  • 25% on the net value estates above R30 million.

Before determining the final value on which estate duty is charged, several deductions need to be considered including income tax and Capital Gain Tax (CGT) as well as the personal debt of the deceased and the estate administration costs, as discussed later in this document.

  1. Income Tax on the Deceased’s Final Income

SARS requires that all outstanding income taxes be settled before distributing the deceased estate to beneficiaries. This includes taxes on any income earned by the deceased until their date of death. For example, such income could come from:

  • Pension payments
  • Investments (such as rental income or interest earned)
  • Business income, if applicable.

The executor of the deceased estate needs to file a final tax return, also called the “deceased estate return,” to reflect all income accrued up to the date of death. Once this is done, the income tax liability is deducted from the estate’s value before calculating estate duty together with administration costs like executor’s fees, Master’s fees, advertisement costs, transfer costs, valuation costs, funeral costs and all monies paid to creditors.

Once the estate of a deceased person is set up, it receives a unique tax number. The executor is tasked with reporting all income and related expenses that arise after the person’s death. This income must be declared to SARS using the ITR12 return. After taking charge of the deceased’s assets, the executor reports the estate as a Taxpayer and is responsible for reporting any income earned those assets generate, such as rental or interest income, as it becomes part of the estate’s taxable earnings.

  1. Capital Gains Tax (CGT) Upon Death

Furthermore, all South African residents, whether living or deceased, are required to pay capital gains tax (CGT) on the gain or profit made when disposing of an asset.

The death of an individual is treated as a deemed disposal of assets, and CGT becomes payable on any gains made by the estate at the time of death. A deceased person is therefore deemed to have disposed of their assets for an amount equal to the market value or actual sale value, if applicable, of the assets on the date of their death, including assets such as immovable property, shares, and unit trusts.

Primary Residence Exclusion

Based on the Income Tax Act, you will not have to pay capital gains tax on the first R 2 million you make when you sell your home or primary residence.

The 60-plussers who own a home could therefore benefit from a primary residence exclusion, and the first R2 million of gain on the sale of their primary residence is exempt from CGT. This can significantly reduce the estate’s tax liability if the home’s value has appreciated over time.

If you do own foreign assets, it’s crucial to understand the tax laws of the country where the assets are located and check if a double taxation agreement exists with South Africa to prevent being taxed twice upon death.

  1. CGT Exclusions and Rebates for the Deceased Estate

It is important to note that there are several exclusions and rebates which can be utilised when calculating the CGT payable by a deceased estate. 

In terms of the Income Tax Act, the following are excluded from the deemed disposal:

  • a long-term insurance policy of the deceased in respect of which, if the proceeds had accrued to the deceased, the capital gain or loss would be disregarded;
  • an interest in a pension, provident or retirement fund in South Africa or a similar fund outside of South Africa;
  • the annual exclusion of R 40 000 is available to the estate where the executor disposes of assets other than to heirs or legatees.
  • A R300,000 annual exclusion is also allowed for the year of death, as opposed to the standard R40,000 exclusion.
  • Any asset left to a surviving spouse is exempt from CGT at the time of death, with the tax being deferred until the surviving spouse disposes of the asset or passes away. It is important for the executor in the estate of the first dying to keep record of the base costs as it will become applicable on death of the surviving spouse.
  1. Deductions from the Estate

Before estate duty is calculated, the estate is reduced by allowable deductions, including:

  • Debts and liabilities: All outstanding debts, including the final income tax liability and CGT.
  • Bequests to spouses: Any assets bequeathed to a spouse are fully deductible under Section 4(q) of the Estate Duty Act, meaning no estate duty is payable on assets left to a spouse.
  • Therefore, when the net value of the estate has been determined, the dutiable amount is determined by deducting from the net value the amount of R 3.5 million.
  1. Death of a Second Dying Spouse

In respect of the death of a second dying spouse, the deduction allowed will be R 7 million, reduced by the amount deducted in the estate of the predeceased spouse. This is referred to as “roll-over” relief. When calculating estate duty, the first R3.5 million of the estate’s value is not subject to tax. If the deceased is the first spouse to pass away, any unused portion of their abatement can be transferred to the surviving spouse, allowing for an estate duty exemption of up to R7 million upon the surviving spouse’s death. Furthermore, no estate duty will be applied to assets left to the surviving spouse, including proceeds from a domestic life insurance policy.    

  1. Estate Planning Considerations for 60 plussers

For 60 plussers, it’s vital to integrate both income tax and CGT considerations into estate planning. Some strategies include:

  • Drafting a Will that ensures optimal use of spousal deductions and rollovers.
  • Regularly reviewing investments to understand potential CGT liabilities and apply available exclusions effectively.
  • Seeking professional advice from tax advisors or estate planners to minimise estate duty and other tax burdens.
  • Appointing a suitably qualified executor who will be able to identify how to minimize the impact of tax liabilities on the deceased estate.

Notably, assets held in retirement annuities, pension funds, provident funds, or living annuities are excluded from the deceased estate and are not factored into estate duty calculations, making these investment options valuable tools for estate planning.

Conclusion

For 60 plussers, understanding how income tax and CGT deductions affect estate duty is crucial in preserving your legacy. By utilizing exclusions, deductions, and careful planning, you can ensure that more of your estate reaches your heirs rather than being paid in taxes. Consulting with a tax advisor or legal professional who understands estate duty laws and tax implications can further help you craft a comprehensive plan tailored to your financial situation.

CLICK HERE TO READ MORE : Navigating the Complexities of Business Partnership After a Partner’s Demise

CLICK HERE TO READ MORE : Why You Need an Executor for Your Will: A Guide for Seniors

 

FOR ENQUIRIES:

Meyer de Waal
MDW INC meyer@mdwinc.co.za
021 461 0065 & 083 653 6975

 

Jan Pretorius
jan@perpetualservices.co.za
082 889 4000


Daniela Papa
daniela@mdwinc.co.za
021 461 0065 & 083 783 8494


Devedine Armstrong
devedine@mdwinc.co.za
021 461 0065 & 076 902 4027

 

or complete the following form and we will get back to you

 

CLICK HERE TO READ MORE: MDW INC, Your Estate Planning Partner

 

*Please note: MDW INC offers a maximum of 5 free basic wills per month to pensioners.
Should a will be complex in nature, MDW INC has the right to discuss a fee structure being put in place with the person concerned.

 

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