Tax at Death: A Guide to Navigating Estate Duty and Income Tax
Introduction: At van Heerden Attorneys, we understand that planning for the transfer of...
Introduction: At van Heerden Attorneys, we understand that planning for the transfer of...
Introduction:
At van Heerden Attorneys, we understand that planning for the transfer of your wealth at death is vital. Such transfer does however trigger tax at death, namely Estate Duty and Capital Gains Tax. Navigating these taxes are crucial for protecting the accumulated wealth intended for your beneficiaries. This article explores the key tax issues arising at death.
1. Estate Duty: The Wealth Transfer Tax
Estate Duty is levied on the deceased estate and is essentially a tax on the transfer of wealth. This duty is governed by the Estate Duty Act 45 of 1955.
If you were ordinarily resident in South Africa, this duty is applied to your worldwide assets, including any right you held in or to property. The calculation follows three steps:
The standard abatement currently allowed against the net value of the estate is R3.5 million. A vital provision allows a surviving spouse to utilize any unused portion of the pre-deceased spouse’s R3.5 million abatement, potentially increasing the surviving spouse's total tax-free allowance to R7 million.
Estate duty is levied at a rate of 20 per cent on the first R30 million of the dutiable estate and 25 per cent on any value exceeding R30 million.
2. Income Tax for the Deceased (Including Capital Gains Tax)
When a natural person dies, their personal liability for income tax and their year of assessment (tax year) ends immediately on the date of death. This requires a final tax assessment for the period running up to the date of death.
The key tax triggered here is Capital Gains Tax (CGT). The death of the taxpayer is specifically treated as a deemed disposal, it’s treated as if the deceased sold all their assets to their estate for their market value on date of death. This triggers the CGT liability, which is calculated as part of the deceased person’s final income tax assessment.
Relief Measures: The amount of CGT payable by the deceased is considered a debt in the estate and is deductible for Estate Duty purposes. Furthermore, a significant relief known as the "roll-over" applies when assets are bequeathed to a surviving spouse. In this case, the CGT liability is postponed until the surviving spouse eventually sells the asset.
3. Income Tax for the Deceased Estate (Including Capital Gains Tax)
Upon death, a deceased estate comes into existence and is treated as a separate, new taxpayer, distinct from the deceased person.
Income Tax Implications: The deceased estate must account for any income that arises or accrues after the date of death, such as interest, investment income, or rental income. The estate is taxed using the same sliding scale tax rates applicable to individual natural persons. The estate is generally entitled to deductions for administration costs and an annual interest exemption.
Capital Gains Tax Implications: If the executor sells assets to third parties during the administration process, this triggers CGT in the hands of the deceased estate. The estate benefits from its own annual CGT exclusion and certain exclusions related to a primary residence (up to a R2 million disregarded gain). However, when assets are ultimately transferred directly from the estate to an heir or legatee, this transfer usually benefits from further roll-over relief, meaning the estate generally does not pay CGT on that transfer.
Conclusion:
At Van Heerden Attorneys, we understand that managing these overlapping tax requirements can be overwhelming for families navigating loss. We guide you through this complex process, ensuring that your tax affairs are in order after death. Contact us today to ensure your affairs are in order, your peace of mind starts here.
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