Final account: Determining your estate duty liability

Determining the estate duty liability in your estate is a critical part of the planning process as it allows the estate planner to put mechanisms in place to address any shortfalls that may exist, thereby ensuring that your loved ones receive the full inheritance intended for them.

In terms of South African legislation, no tax is payable by a beneficiary on assets received as an inheritance – whether through testate or intestate succession. This is because an inherited asset is regarded as a capital receipt and is not included in a taxpayer’s gross income. As such, inheritance tax – which we refer to as estate duty – is paid by the deceased estate before any assets are transferred to the beneficiaries.

Here’s how it works.

Estate duty, which is levied in terms of the Estate Duty Act, is payable at a flat rate of 20% on the net value of a deceased estate up to R30 million. To the extent that the net value of the estate exceeds R30 million, a flat rate of 25% is levied. In order to determine your estate duty liability, you will need to calculate the value of all your property and subtract the allowable deductions and expenses to arrive at a net estate value which, depending on the value, may be subject to estate duty.

That said, understanding what assets fall within the definition of property, and what deductions are allowable, is key to determining your estate’s net value. Further, understanding the extent to which your matrimonial property regime impacts these calculations is key to getting your numbers right. 

Property

In terms of Section 3(2) of the Act, estate duty is calculated on the value of all your property, and this includes movable and immovable property, as well as corporeal and incorporeal property. While corporeal property refers to physical, tangible property such as a vehicle or a home, incorporeal property includes non-tangible rights such as servitudes and leaves over immovable property.

If you are an ordinary resident of South Africa, property refers to your worldwide assets.

Deemed property

You will also need to include the value of all deemed property in your estate, with deemed property referring to those assets which do not exist at the date of death, but which will come into fruition in the event of your death, such as life insurance policies or pension payouts. In this regard, it is important to note the following:

• Deemed property includes the proceeds of domestic insurance policies taken out on your life, although keep in mind that if the proceeds are payable to your spouse in terms of a registered antenuptial contract, they are excluded for estate duty purposes. Similarly, the proceeds of business assurance policies which are correctly structured are exempt from estate duty.
• Any benefits payable by an approved retirement fund, including pension, provident, preservation and retirement annuity funds as a result of your death are not considered deemed property in your estate.
• If you are married with the accrual system, any amount owing to your estate in respect of an accrual claim is concerned deemed property in your deceased estate.
• Where you make donations which arise as a result of your death – referred to as a donatio mortis causa – the donation is exempt from donations tax although the value will be included for estate duty purposes. To qualify as a donatio mortis causa, the transfer of ownership must be contingent on your death, must be executed in terms of your will, and must be accepted by the donee prior to your death.

Deductions

As an ordinary resident of South Africa, the Act makes provision for the value of certain assets to be deducted from your estate before levying estate duty. These include:

• Section 4(a): The cost of funeral, tombstone, and deathbed expenses, including doctor’s fees, burial and cremation costs, as well as death notice advertisements, although keep in mind that these costs must be deemed reasonable, failing which Sars will not permit them to be deducted.
• Section 4(b): Debts owed in South Africa, including any taxes owing to Sars, including income tax and capital gains tax.
• Section 4(c) and (d): The costs of administration, including executor’s fees, Master’s fees, bank costs on the estate late bank account, newspaper advertisement costs, transfer and bond cancellation costs, and valuation costs.
• Section 4(h): Bequests made to certain public benefit organisations that are approved in terms of Section 18A of the Income Tax Act.
• Section 4(q) deduction: In terms of this section of the Estate Duty Act, no estate duty is payable on the value of the assets bequeathed to your surviving spouse but will be postponed until the death of the second-dying spouse. This deduction extends to the proceeds of domestic life policies that are payable to your surviving spouse.

Section 4A abatement

Once you have determined the net value of your estate after subtracting the allowable deductions as listed above, you will need to apply the R3.5 million abatement provided in terms of Section 4A of the Act. In terms of this section, estate duty will only be charged on the net value of your estate which exceeds this abatement. If you are the first-dying spouse, this abatement can be rolled over to your surviving spouse who will then have up to a R7 million abatement in the event of their death, meaning that up to the first R7 million net value of their estate will be free from estate duty.

Having said that, keep in mind that bequeathing assets to your surviving spouse has the effect of lowering the value of your estate while increasing the value of theirs. It is therefore important to ensure that you have estate plans developed for each of you as the first-dying spouse so that you fully understand the estate duty implications in each of your estates.

To qualify for this abatement, you and your spouse will need to qualify as spouses in terms of the Act. In this context, a ‘spouse’ includes any recognised marriage or customary union, unions recognised as marriages under tenets of religion, and those married in terms of the Civil Union Act. It may also include same-sex or heterosexual unions which the commissioner is satisfied is intended to be permanent.

Once this abatement has been applied, you will arrive at the dutiable value of your estate which, if under R30 million, will be liable to estate duty at a flat rate of 20%.

With this in mind, one of the primary functions of estate planning is to reduce the amount of tax your deceased estate is liable for, and this can be done in a number of ways, including the use of retirement products, inter vivos trusts, and donations, and these instruments should all be considered in the development of your plan.