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Estate Duty is not something anyone ever hopes to have to deal with, being part of the larger role of administering a deceased estate.
As a result, many are unaware and unprepared for the tax implications of administering the estate, an unhappy surprise that seemingly appears from the aether with painful consequences.
In brief layman terms, estate duty is a tax levied on the dutiable amount of a deceased person’s estate before the assets are distributed to beneficiaries. There is some further complexity, reliant on the Order in which an estate is administered, but that can follow hereunder.
In South Africa, this estate duty tax is payable by the estate itself, not by the individuals who inherit the assets, so if you are an heir, there is that news, although admittedly, your inheritance is paying taxes.
The South African Revenue Service (SARS) administers estate duty under the Estate Duty Act of 1955.
Ultimately however, the tax is not an option when the estate can support it, so if you don’t want to pay this tax, don’t die.
As mentioned above, estate duty is calculated as part of the larger activity of administering an estate.
Upon having determined the gross value of the estate, the Executor may calculate the Estate Duty payable.
This takes the gross value of the estate in the form of property and deemed property, and decreases the estate liabilities, to find the Nett value of the estate. This Nett value then has the primary rebate decreased from it. This rebate, also known as a Section 4A abatement, is of R3.5 million, and the amount left over is the dutiable estate. This Section may itself be found in the Estate Duty Act.
It should be noted that the unused portion of a predeceased spouse’s R3.5 million abatement can be rolled over to the surviving spouse, potentially increasing their total abatement to R7 million upon their death. This dutiable amount is then taken, and the final Estate Duty payable is then calculated
The first R30 million of the estate duty payable is taxed at 20%, meaning an amount of up to R 6 million in taxes.
Any dutiable amount exceeding R30 million is taxed at 25%. As a result, where the dutiable amount was of R50 million for example, then the Estate Duty payable would be R6 million for the R30 million with another R5 million for the R20 million.
It should be noted by all in this position that the estate duty return (REV267) must be lodged with SARS, typically within 12 months of date of death, together with supporting schedules.
There may be further taxes to consider in the execution and administration of deceased estates.
Capital Gains Tax exists due to the death of an individual being considered a “deemed disposal” of all their assets. The estate is therefore liable for CGT on the difference between the market value of the assets at the time of death and their base cost. This would form part of the estate liabilities, and as such would be deducted from the estate before calculating the estate duty payable.
Income Tax, strange as it may be to consider, can exist on income post-death. This is a tax on any income that the estate may make, such as a harvest on a farm or vineyard, interest on a bank account or investment. This is separate to Executor’s fees as discussed below.
VAT implications may also be involved if the deceased was a registered VAT vendor as if the deceased’s business is still operating, the estate must be registered as a new VAT entity.
Likewise, the Executor must further account for output VAT on all business assets transferred from the deceased to the estate.
As mentioned above, there is a difference between Executor’s fees and estate duty.
Executor’s fees are fees the Executor is entitled to as recompense for their duties. This is an amount of 3.5% on the gross assets of the estate, as well as 6% of all net income received by the estate after the death of the deceased.
This forms part of the claims against the estate, or it’s liabilities if you prefer. Consequently, this forms part of the calculation of the nett estate, before one even calculates Estate Duty.
Estate Duty, as we have discussed, then comes afterwards.
There is also the key difference in that the Executor’s Fees are fees that the Executor is entitled to while Estate Duty is a tax owed to SARS.
As you might have guessed, there are a number of possible ways this can go wrong, in the calculation of estate duty, and as there are penalties for not meeting one’s necessary tax obligations, this is obviously something one would wish to avoid.
Any undervaluation of assets, failure to consider CGT, or liquidity shortfalls can impact the calculation of the Liquidation and Distribution Account for the Estate, and consequently, can upset the calculation of the dutiable amount and Estate Duty payable.
There are ways to protect your estate while alive. The forming of Trusts, insurance premiums to the benefit of your beneficiaries, Wills stipulating cash bequests, and estate planning strategies to reduce duty or avoid disputes are all options that can be taken.
To describe each of these steps would result in an overly prolix article and reach beyond the scope of this article but for the present, it is best to note that these are options that exist, and should you require assistance, then professional assistance may be sought in doing so.
At MVA Inc., we can advise on tax-efficient estate planning, drafting Wills and administering estates with proper compliance with regards to tax obligations and legal requirements as necessary.
From the drafting of the Will to protect the estate, establishing Trusts for the benefit of beneficiaries and ensuring the estate is administered to meet all legal and associated obligations, MVA Inc may provide assistance.
Estate Duty is a sometimes complex endeavour and calculation, tough regrettably, sometimes necessary, that forms part of the Executor’s duties.
Consequently, whilst many struggle through and have administered estates by themselves, it is recommended that one seeks professional assistance to avoid pitfalls and any issues related to the administration of estates.
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