Death and taxes
26 Feb 2021
There are very few certainties in life. And 2020 has seemingly proven this (time and time again). But it was Christopher Bullock who coined the commonly used phrase in his work – the Cobbler of Preston (published in 1716), when he noted, “’tis impossible to be sure of anything but Death and Taxes”, predating Benjamin Franklin’s more famous coining of the phrase in his letter to Jean-Baptiste Le Roy by some seventy-three years (in 1789). Who knew?
Whatever the origin and despite the some 304 years that have passed, the phrase (and its meaning) is still accepted as a certainty with no signs of diminishing use or application. But death and taxes (which go hand in hand), actually do apply (simultaneously) where inheritance tax is concerned.
Stop a second. Before we get into the specifics involving inheritance tax, let’s start off with some basics.
What is tax?
According to Collin’s dictionary, Tax is an amount of money that you have to pay to the government so that it can pay for public services.
Seems straightforward enough…
But, what do I actually pay tax on?
A person’s liability for tax is derived from their income. And according to SARS, income tax (derived from money received) is the normal tax which is paid on your taxable income. Income tax is levied at progressive rates depending on a person’s taxable income for the year. This is calculated by subtracting allowable deductions and exempt amounts from gross income. Some examples (not an exhaustive list) of taxable income include remuneration (income from employment), such as, salaries, wages, bonuses, overtime pay, taxable (fringe) benefits, allowances and certain lump sum benefits, income or profits arising from an individual being a beneficiary of a trust and capital gains tax.
Alright. But what does income have to do with “Death and Taxes”?
Simple – when a natural person dies, that person is called a ‘deceased person’ and all his or her assets on the date of death are placed in an estate. This estate is then referred to as a deceased estate. And arising from this deceased estate are certain inheritance taxes that the deceased estate has to pay, in addition to the personal income tax (which is levied on the income that the deceased person received before their death) for the deceased’s final tax year.
Wait. What exactly is inheritance tax?
Inheritance tax is levied on what the deceased leaves behind (such as money or property). Laws that apply to inheritance tax include –
- The Administration of Estates Act (Act 66 of 1965), which regulates the disposal of deceased estates in South Africa;
- The Wills Act (Act 7 of 1953), which affects all testators with property in South Africa;
- The Intestate Succession Act (Act 81 of 1987), which is applicable to all deceased individuals who have property in South Africa and who left no valid will;
- The Estate Duty Act 45 of 1955, which imposes an estate duty on the estates of deceased persons
Inheritance tax is made up of the following taxes –
- Income Tax for the deceased individual (Personal Taxes);
- Capital Gains Tax;
- Estate Duty Tax, and
- Donations Tax (if applicable to the specific Estate).
So let’s see if we understand this – when someone passes away there are certain taxes that become payable on their estate?
We will now take a closer look at the most relevant taxes (such as income tax, capital gains tax and estate duty)…
When a person passes away, the executor steps into the shoes of the deceased and is thereafter liable for their relevant tax returns. This means that the executor has to ensure that all relevant tax returns of the deceased are completed, submitted and assessed by SARS for payment by the estate (if applicable). Once these tax returns have been formally assessed and paid, the executor’s responsibility to declare income for the deceased would end in that no further tax returns would have to be lodged by them.
Keep in mind –
Prior to 1 March 2016, tax returns would have to be submitted until the deceased’s date of death, meaning that all arrear returns, together with the final return, would then be applicable for the period from 1 March (of that particular tax year) until the deceased’s date of death. These would then have to be submitted for assessment. But an amendment was made to the Income Tax Act, which affected all deceased estates where the deceased passed away on or after 1 March 2016. In terms of the amendment, the pre-date of death tax position would remain the same for the executors, but they would now receive a further responsibility in that, once the pre-date of death taxes have been finalised, the estate would have to be registered as a new taxpayer. The executor would, once again, have to account for all income earned in the estate from the day after the date of death until the liquidation and distribution account has lain for inspection for not less than 21 days (as set out in Section 35(1)(c)(4) of the Administration of Estates Act) and become final under section 35(12) of the Administration of Estates Act. Following this, the assets (which until that stage were being held by the deceased estate), will either be handed over to the heirs or delivered to the trustee of a trust estate (as the case may be).
Capital Gains Tax (CGT)
When a person passes away, they (according to the Income Tax Act) are deemed to have disposed of their assets. This is because there has been a “change of ownership” as the assets will now be inherited by the heir/s in the estate. This disposal of assets would therefore, due to the fact that there is a deemed gain representing the value increase from the base cost (i.e. the acquisition value plus some allowed additions, for example, capital improvements to a house) to the market value on the date of death, is potentially subject to capital gains tax.
Take note –
Any post date of death sales would now form a part of the applicable post date of death tax returns and the executor would have to account for any sales out of the estate in the applicable post date of death tax period.
Are there any exclusions where CGT is concerned?
Yes! There are certain exclusionary rebates applicable to assets that are to be transferred to a resident surviving spouse. Any tax payable would amount to a liability in the estate and would therefore be deductible for estate duty purposes. In addition, a gain of up to R2 million on an individual’s primary residence is excluded, as are personal assets such as private vehicles. Cash is also exempt from CGT. While individuals have an annual capital gain exclusion of R40 000 during their lives, the exclusion in the year of their death is R300 000.
Estate Duty (the most widely associated tax with an individual’s passing) is levied on the worldwide property and deemed property of a natural person who is ordinarily resident in South Africa and on South African property of non-residents.
However, this tax is only payable if (under section 4 of the Estate Duty Act, dealing with allowable deductions) the net value of the estate exceeds R3.5 million. The estate duty is then levied on the dutiable value (or taxable amount) of an estate at a rate of 20% on the first R30 million and at a rate of 25% on the dutiable value of the estate above R30 million. When the final figure of estate duty is determined, it is normally the responsibility of the executor of the deceased estate to pay the tax over to SARS before the remaining funds are paid over to the beneficiaries.
What are the allowable deductions?
In terms of Section 4A of the Act, a deduction of R3.5 million is allowed when determining the amount of estate duty to be paid. Deductions are also allowed for liabilities, bequests made to qualifying public benefit organisations, and property accruing to surviving spouses – either in terms of a will or by intestate succession. In respect of the estate of a person dying on or after 1 January 2009, all benefits (including lump-sum benefits), payable from South African pension, provident and/or retirement annuity funds – are not deemed as ‘property’, and are therefore not subject to estate duty.
What about life insurance policies?
In terms of Section 3(3)(a) of the Estate Duty Act, the proceeds of a life insurance policy are seen as property in the estate of a deceased person, except if –
1. the policy is recoverable by the surviving spouse or child of the deceased under a duly registered ante- or post-nuptial contract for estate duty purposes;
2. The Commissioner is satisfied that:
a) the policy was acquired by a person who on the deceased’s date of death was his or her partner, or held any share or interest in a company in which the deceased on that date held any share or interest;
b) no premium on the policy was paid by the deceased;
c) such policy was not effected by or at the instance of the deceased
d) no amount due under such policy has been or will be paid into the estate of the deceased, and
e) no such amount has been or will be paid to, or used for the benefit of, any relative of the deceased or any person who was dependent on the deceased, or any company that was at any time a family company in relation to the deceased.
The life insurance policies referred to above include policies where a spouse or child are nominated beneficiaries, buy and sell policies, and key-person policies that conform to the conditions as set out in the Estate Duty Act. It’s important to note that endowment policies (local and offshore) that don’t pay out on the death of a life assured, but are owned or part owned by a deceased policyholder, will be subject to estate duty. The surrender value of the policy must be included as property in the deceased estate.
Are there any exclusions where estate duty is concerned?
Where the deceased has a surviving spouse, there is an exclusion of all assets bequeathed to the surviving spouse in that there would be no duty applicable. There is also a portable spousal abatement that applies on the death of the last dying in which case the estate duty rebate would be R7 million (R3.5 million x 2), less the amount deducted from the net value of the estate of any one of the previously deceased persons as dictated by the section. Where the deceased is a surviving spouse of one or more marriages, the amount subtracted is limited to one predeceased spouse.
Hold on – is the beneficiary of a deceased estate liable for any of these taxes?
In South Africa, there is no tax payable by a beneficiary on assets received from an inheritance. SARS explains the situation as follows –
“An asset inherited is a “capital receipt” and is therefore not included in the taxpayer’s gross income. Therefore, in South Africa, there is no tax payable by a person who receives an inheritance. Capital Gains Tax (CGT) is also not payable by the recipient of an inheritance”.
And although the beneficiary does not have to pay inheritance tax on what he or she inherits, inheritance tax applies to the estate of a deceased person in the form of estate duty i.e. the tax is paid on the estate before it goes to the beneficiary or beneficiaries.
So, if you are the beneficiary of your wealthy uncle’s estate, fret not. The estate is liable for the taxes. Not you.
The values, deductions and exclusions of the various taxes (as discussed above) can become quite complex and intricate. It is therefore imperative that you consult with your legal advisor when considering your estate planning process. For example, calculating estate duty correctly is a complex process with many factors having an influence on the calculation (many of them not discussed in this article). It is therefore important that all of these complexities are looked at carefully prior to the finalisation of your will.
Get in touch with Benaters today to see how we can best assist you with navigating around these details.
Articles sources from Benaters.
- Intestate succession – What does it mean to die intestate?
- Deceased estates
- Deceased Estates – Removing an executor from office
- The lowdown on antenuptial contracts and the accrual system