Although the administration of a deceased estate involves the distribution of benefits to legatees and beneficiaries, the law also requires that applicable taxes and deductions be made before any distribution can be made.
It is important that deductions and taxes are taken into consideration during estate planning and when a will is drawn as this is a complex process especially when the concerned has died.
The applicable taxes on a deceased estate will be discussed below.
Estate Duty is imposed on the established and deemed property of a deceased natural person who is ordinarily resident in South Africa, and on property that is within South Africa belonging to non-residents.
In terms of Section 3 (2) of the Estate Duty Act 45 of 1955, property is defined as ‘any right in or to property, movable or immovable, corporeal or incorporeal.’
Estate duty is not imposed on the estate as a whole, but only on the dutiable estate. The dutiable estate for estate duty purposes is the net value of the estate after deductions from the gross value of the estate as provided in Section 4 of the Estate Duty Act 45 of 1955.
Estate duty is applicable on the net value of the estate in excess of R3 500 000-00 (Three Million Five Hundred Thousand Rand) as follows; 20% on the dutiable estate up to R30 million, and 25% duty payable on dutiable estate above R30 million.
The deductions as provided in Section 4 of the Act inter alia include;
To avoid double taxation where the same assets are due for estate duty, South Africa has entered into estate duty agreement with countries that include Botswana, Zimbabwe, Lesotho, Swaziland, the United Kingdom, and the United States.
Where double taxation happens with a country that has no agreement with South Africa, relief may be sought using domestic rules.
Income Tax is imposed on all income and profit received by a taxpayer. The responsibility to ensure all tax returns of the deceased are up to date with the South African Revenue Services is with the Executor of the deceased estate.
Pursuant to legislative amendments in 2016, two tax assessments were set up to curb the problem where SARS were shortchanged with regards to all income tax due to them.
Firstly, the pre-date of death assessment where all income and applicable deductions are considered until the date of death.
Then secondly, the post-date of death assessment which caters for dividends, rental income and interest that accrued during the administration of the estate until the liquidation and distribution account was approved by the Master of the High Court. This created a further responsibility on the Executor, being to take over the prior responsibility of the beneficiaries to bring up to date and account for the post-date of death tax assessment. This means for deaths on or after 1 March 2016, deceased estates will not be required to register for Special Trusts Type A, but be registered and taxed in their own respect as a new income tax entity.
When a person dies and the assets are transferred to beneficiaries, there are capital gains implications in that the ownership of the assets has to be transferred. Capital Gains Tax is applicable on profit made upon disposal of assets. In terms of the Income Tax Act 58 of 1962, death is a Capital Gains Tax event due to the aforementioned above as the process involves change of asset ownership from the deceased to the beneficiaries.
For estate duty purposes, any payable Capital Gains Tax will reflect as a liability and thus deductible. However, for any post-date of death sales the executor will have to pay all Capital Gains Tax liabilities to SARS before finalizing the winding up of the estate.
Additionally, there are rebates for assets transferred to a resident surviving spouse were otherwise Capital Gains Tax is applicable. Other exclusions include the benefits from life assurance policies; personal use assets (there are certain exceptions); and interests in pension, provident or retirement annuity funds.
A once-off exclusion of R300 000 applies at death, meaning R300 000 will not attract any tax on capital gains made. For amounts above R300 000 an inclusion rate of 40% will apply and this amount will then attract the applicable tax as per the deceased individual’s marginal rate.
Other taxes that are likely to affect an estate are VAT, Donations Tax, and the Section 7C loans as per the Amendment Act, which recognises loans to a trust by a person or company with a connected person relationship.
Tax liabilities are taken in serious light and it is therefore important that when executing estate administration and planning, these be taken into cognizance and put in order.
Contact our Estate Administration Attorneys in Johannesburg.
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