Many people believe that when someone dies, their assets are simply passed on to their loved ones. Unfortunately, it is not always that simple. Before an estate can be distributed, certain taxes, debts and administration costs must be settled. These are paid from the estate, which means they can reduce the value of the inheritance received by beneficiaries. The main taxes that may apply to a deceased estate and payable are:
Estate Duty
Estate Duty is a tax levied on the net value of a deceased person’s estate after allowable deduction and exemptions have been applied. Not every estate is liable for Estate Duty. Small estates may fall below the tax threshold, while larger estates may be required to pay Estate Duty. If Estate Duty is payable, it is paid by the estate before any assets are distributed to the beneficiaries. Simply put, if an estate exceeds the prescribed threshold, a portion of its value may be payable to SARS.
Capital Gains Tax (CGT)
Capital Gains is one of the most misunderstood taxes that may arise when a person dies. Although no assets may actually be sold, South African Tax Law generally treats death as though most assets were sold at their market value on the date of death. This is known as deemed disposal. Assets commonly affected include:
- Residential property
- Holiday homes
- Shares
- Unit trusts
- Investment portfolios
Several exclusions and relief measures are available, so not every asset will result in CGT. The current one-off CGT exclusion of R440 000 applies in the year of your death. Assets bequeathed to your spouse qualify for rollover relief, no CGT is triggered and the spouse inherits the assets at the original base cost.
Final Income Tax
A person’s tax obligations do not end when they pass away. The executor is responsible for ensuring that all outstanding tax returns are submitted including a final income tax return covering the period from the beginning of the tax year (1 March) up to date of death. Any outstanding income tax becomes a debt of the estate and must be paid before the estate can be finalised. Furthermore, the executor also registers the estate for post death income tax as the estate will be liable for income tax from date of death onwards.
Value-Added Tax (VAT)
Most deceased estates will never have to deal with VAT. However, if the deceased owned or operated a VAT-registered business, the executor must ensure that all outstanding VAT obligations are met before the estate can be finalised.
Transfer Duty
Most people believe that transfer duty is payable whenever property is inherited from a deceased estate. In most cases, this is not correct. Property transferred directly to a beneficiary from a deceased estate is generally exempt from transfer duty, although certain circumstances may require further consideration.
Donations Tax
Donations tax is not payable after death, but it plays an important role in estate planning. Annual exemption of R150 000 per tax year. This means that the first R150 000 of a donation made in a tax year is free. Making donations during your lifetime can reduce the value of your estate and may help minimise future estate duty. However, donations that exceed the annual exemption may themselves be subject to donations tax.
Professional advice should always be obtained before making substantial donations.
Conclusion
The good news is that not every estate is liable for every tax. The tax payable depends on the value of the estate, the type of assets owned and the deceased’s individual circumstances. Understanding how these taxes work allows you to plan effectively and protect your legacy.
