Deceased Estate Administration, Wills and Trusts

 

 

Proceeds from domestic life insurance policies taken out on the life of the deceased are considered "deemed property" and are generally included in the gross estate for Estate Duty calculation. However:

  • If the policy proceeds are paid directly to a nominated beneficiary (other than the estate), that beneficiary is liable for the portion of the Estate Duty attributable to that policy.   
  • If the nominated beneficiary is the surviving spouse, the proceeds can be fully exempt from Estate Duty under Section 4(q), provided they accrue directly to the spouse and not via the estate.
  • Certain types of policies, like properly structured "key person" or "buy and sell" policies, may also be exempt under specific conditions.

The dutiable value is calculated by starting with the gross value of all assets in the estate, subtracting allowable deductions, and then subtracting the Section 4A primary abatement.
Gross Value: The total market value of all assets owned by the deceased at the time of death (including property, investments, cash, cars, personal belongings, and certain life policies).   
Allowable Deductions: Specific expenses and bequests permitted by the Estate Duty Act
Section 4A Abatement: A tax-free threshold applied to every estate 

No, South Africa does not have an inheritance tax payable by the beneficiaries on the assets they receive from an inheritance. The tax levied is Estate Duty, which is paid by the deceased's estate (or sometimes directly by the beneficiary as mentioned in Question 2) before the distribution of assets.

As of the latest information, the rates are:

  • 20% on the dutiable value of the estate up to R30 million.   
  • 25% on the portion of the dutiable value that exceeds R30 million. 

Several deductions can reduce the dutiable value of an estate, including:

  • Debts and Liabilities: All verified debts owed by the deceased at the time of death (e.g., mortgages, loans, credit cards, outstanding taxes).   
  • Funeral and Deathbed Expenses: Reasonable costs associated with the funeral, burial or cremation, and medical expenses incurred just before death.   
  • Administration Costs: Fees and expenses incurred in the process of winding up the estate, such as executor's fees, Master's fees, and valuation costs.
  • Bequests to a Surviving Spouse (Section 4(q)): Any assets left to a surviving spouse (including civil partners and those in registered domestic partnerships) are fully deductible and exempt from Estate Duty in the first-dying spouse's estate.   
  • Charitable Donations (Section 4(h)): Bequests made to approved public benefit organisations (PBOs) are deductible.   
  • Certain Assets: Proceeds from approved retirement funds (pension, provident, retirement annuity funds) and certain life policies payable directly to nominated beneficiaries (though deemed property, their treatment affects who pays the duty) do not typically form part of the dutiable estate or have specific exemptions.   
     
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Estate Duty

Understanding Estate Duty in South Africa - Calculating the Dutiable Value

Estate planning involves more than just outlining who receives your assets. A crucial element is understanding the potential impact of Estate Duty – a tax levied on the value of your estate upon your passing. Navigating the complexities of Estate Duty and accurately calculating the dutiable value of your estate is essential for effective planning and ensuring your beneficiaries receive as much of your legacy as possible.

At VDM Attorneys, we understand that the prospect of Estate Duty can be daunting. This guide provides a simplified explanation of how the dutiable value of an estate is determined in South Africa, highlighting key deductions and rebates that can influence the final tax liability.

What is Estate Duty?

Estate Duty is a tax imposed by the South African Revenue Service (SARS) on the transfer of wealth from a deceased person's estate to their heirs. It is levied on the dutiable value of the estate. Currently, the Estate Duty rates are:

20% on the first R30 million of the dutiable value.
25% on the portion of the dutiable value exceeding R30 million.
Estate Duty is applicable to the worldwide assets of individuals who were ordinarily resident in South Africa at the time of their death, and to the South African assets of non-residents.

What is the Dutiable Value of an Estate?

The dutiable value is the amount on which Estate Duty is calculated. It is arrived at by taking the gross value of the estate and subtracting all allowable deductions and the Section 4A primary rebate (abatement).

Determining the Gross Value of Your Estate

The gross value of your estate includes the market value of all assets and interests held by you at the time of your death. This typically encompasses:

  • Immovable Property Houses, farms, commercial properties, etc.
  • Movable Property Vehicles, furniture, art, jewellery, personal effects.
  • Investments Shares, unit trusts, bonds, and other financial instruments.
  • Cash Funds held in bank accounts or other liquid forms.
  • Certain Life Insurance Policies Policies where the payout is made directly to the estate. (Note: Policies paid directly to a nominated beneficiary are deemed property but often treated differently for administration and payment of duty – see below).
  • Business Interests Shares in private companies, interests in partnerships, etc.
  • "Deemed Property" Assets or benefits received because of your death, including proceeds from domestic life policies even if paid to a beneficiary (though the beneficiary is liable for the portion of duty attributable to the policy).

The sum of the values of all these assets constitutes the gross value of your estate – the starting point for the calculation.

Reducing the Dutiable Value - Allowable Deductions

Fortunately, SA  law provides for several deductions that can significantly reduce the gross value of your estate to arrive at a lower dutiable value.
Key deductions include:

  • Debts and Liabilities Any debts or financial obligations outstanding at the date of death are deductible. This includes mortgage bonds, personal loans, credit card debt, outstanding income tax, and unpaid medical expenses.
  • Funeral and Administration Costs Reasonable funeral expenses (including a tombstone) and the costs incurred in winding up the estate are deductible. This includes executor's fees, legal fees, and property valuation costs.
  • Bequests to a Surviving Spouse (Section 4(q)) This is a major deduction. Any assets bequeathed to a surviving spouse (including civil, customary, and registered domestic partners) are fully exempt from Estate Duty.
  • Charitable Donations (Section 4(h)) Bequests made to qualifying public benefit organisations (PBOs) are deductible.
  • Assets Not Forming Part of the Estate Certain assets are specifically excluded, such as proceeds from life insurance policies where the beneficiary is someone other than the estate (although deemed property, their treatment impacts who pays the duty) and payouts from approved retirement funds (pension, provident, retirement annuity funds).

The Section 4A Primary Rebate (Abatement)

After subtracting the allowable deductions from the gross estate value, a further deduction known as the Section 4A abatement is applied. This acts as a tax-free threshold.

Currently, the first R3.5 million of the net value of the estate (gross value minus deductions) is exempt from Estate Duty.
For married individuals, the unused portion of the R3.5 million abatement of the first-dying spouse can be transferred to the surviving spouse's estate. This means the surviving spouse's estate could potentially benefit from a combined abatement of up to R7 million, significantly reducing or eliminating Estate Duty liability in the second estate.

Step-by-Step - Calculating the Dutiable Value

To summarise, the calculation of the dutiable value follows these general steps:

  • Calculate the Gross Value - Sum the market value of all assets and deemed property at the date of death.
  • Subtract Allowable Deductions - Deduct all debts, funeral and administration costs, bequests to a surviving spouse, and charitable donations.
  • Subtract the Section 4A Rebate - Deduct the R3.5 million primary abatement (plus any transferred abatement from a predeceased spouse).
  • The Result is the Dutiable Value - This is the value subject to Estate Duty at the applicable rates (20% or 25%).

Who is Responsible for Paying Estate Duty?

The primary responsibility for calculating and paying Estate Duty lies with the Executor of the deceased estate. The executor must complete and submit the Estate Duty Return (Rev267) to SARS and the Master of the High Court, along with the Liquidation and Distribution Account.

While the executor pays the duty from the estate assets, there are instances where the duty attributable to a specific asset is payable directly by the beneficiary who receives that asset (e.g., the beneficiary of a life policy paid directly to them).

Executors can be held personally liable for unpaid Estate Duty under certain circumstances, particularly if they distribute assets without settling the tax liability.

When is Estate Duty Due?

Estate Duty is generally due within one year from the date of death or within 30 days from the date SARS issues the assessment, whichever date is earlier if the assessment is issued within the one-year period. Interest is levied on late payments.

Double Taxation Considerations

If you own assets in a foreign country, those assets may be subject to a similar death tax in that country as well as Estate Duty in South Africa. South Africa has entered into Double Taxation Agreements regarding Estate Duty with certain countries (such as the UK, USA, and some neighbouring countries) to provide relief and prevent assets from being taxed twice. Where no agreement exists, domestic legislation provides mechanisms for relief.

The Role of VDM Attorneys in Your Estate Planning

Understanding estate duty and its calculation is a vital component of comprehensive estate planning. By being aware of allowable deductions, exemptions, and the Section 4A rebate, you can proactively take steps to potentially minimize your estate's tax burden and ensure a smoother transfer of wealth to your loved ones.

At VDM Attorneys, our experienced professionals can provide expert guidance on navigating the complexities of estate duty. We can assist you in:

  • Accurately assessing the potential estate duty liability.
  • Identifying and implementing strategies to maximize allowable deductions and utilize the Section 4A rebate effectively.
  • Structuring your estate plan to minimize tax implications while aligning with your wishes.

Contact VDM Attorneys today for personalized advice and assistance in planning your estate effectively, ensuring your legacy is protected and your beneficiaries are well-provided for.