Estate Duty is the tax levied at 20% on your dutiable estate as a result of your death.
The Estate Duty Act applies to the estates of all deceased persons who were resident in South Africa at the time of their death.
How is the Estate Duty determined?
The way in which your Estate Duty is calculated, depends firstly on whether or not you are married, and if you are married, according to which marital property regime (i.e. in community of property, out of community of property, with or without the accrual system).
Thereafter the total gross value of your estate is determined. This consists of all property (assets) and rights to property (e.g. usufruct) registered in your name at date of death, as well as all deemed property (including proceeds from certain domestic life insurance policies and claims in terms of the Matrimonial Property Act).
The value of your gross estate, less all deductions permitted in terms of section 4 of the Estate Duty Act, equals your net estate.
From your net estate the allowable abatement permitted in terms of the section 4A of the Estate Duty Act (currently R3 500 000) is deducted to determine the value of your dutiable estate. The Estate Duty payable is calculated at a flat rate of 20% of your dutiable estate.
In other words, a liability for Estate Duty will only arise if your net estate is more than R 3 500 000.
What costs are payable on your Estate?
While you may not be liable for Estate Duty, provision must be made for the other costs applicable to the winding up of your estate, namely:
- Capital Gains Tax
- Administration costs
Creditors have the first claim to your estate. Creditors consist of loans owed by you to any person / entity on the date of your death, taxes due to SARS, and if applicable, an accrual claim payable to your surviving spouse.
Capital Gains Tax
When someone dies, he/she is deemed to have disposed of all assets that are held at death at the market value of each asset. This deemed disposal gives rise to Capital Gains Tax. At death, an individual receives an exclusion of R300 000 instead of the normal annual exclusion of R30 000.
If your assets accrue to your surviving spouse, the Capital Gains Tax will also roll over to your spouse.
After creditors have been paid, provision must be made for any administration costs applicable to the administration of your deceased estate. Examples are:
- Executor’s fees: Executor’s fees are the fees charged by the executor for the administration of your deceased estate. The maximum fee allowed is 3.99% (including VAT) of your gross estate. These fees are usually negotiable, depending on the size and complexity of your estate.
- Master’s fee: The Master’s fee is a fixed administration fee payable to the Master and it is currently R600.
- Basic funeral expenses.
- Bank costs on the estate late bank account.
- Newspaper advertisement costs.
- Transfer costs and bond cancellation costs for transfer of immovable property.
- Valuation costs if a minor child is an heir of the estate.
Can you save Estate Duty and Executors’ fees?
The smaller your dutiable estate is, the less Estate Duty and Executors’ fees you will have to pay. There are a couple of estate planning initiatives that you can consider. Please note that you should consider your own personal circumstances and consult a financial advisor before implementing any changes to your will or estate to ensure that it is in your and your beneficiaries’ best interest. It is also important to incorporate any Regulatory changes into your estate planning.
Bequests to a spouse
Bequests to your spouse is a deductible bequest in terms of section 4q of the Estate Duty Act. The unused portion of your section 4A abatement also rolls over to your surviving spouse automatically. Thus, if your net estate was equal to zero and you did not use your abatement, your surviving spouse will be permitted to deduct R7 000 000 (their own R3 500 000 plus your R3 500 000) from their net estate for the calculation of Estate Duty.
Whilst bequeathing assets to your spouse lowers the value of your dutiable estate, it increases the value of their estate. The advantage of leaving assets to the surviving spouse is the postponement of estate duty not the lowering of it.
You can move assets from your estate to a trust. This provides estate freezing as all future growth of the assets occur in the trust instead of in your estate. The assets can be moved to a trust either by way of selling it to the trust via a loan account or a donation (please note that donations above R100 000 per annum are taxed at a flat rate of 20%). The resultant loan account can however be lowered each year by way of an annual donation of R100 000.
All retirement products which includes retirement annuities, living annuities, pension-, provident- and preservation funds are excluded from your estate for Estate Duty purposes at this stage. (Please note that retirement funds are subject to the Pension Funds Act which affects the naming of beneficiaries of these benefits).
If beneficiaries are nominated on your life policies, it is exempt from Executor’s fees. The life policy will however be a deemed asset in your estate and estate duty taxes will be levied on it. It is important to consider the estate’s liquidity requirements when nominating beneficiaries as there is a risk that the beneficiaries do not want to repay any policy proceeds to the estate to cover liquidity shortcomings.
Most important factors regarding your Estate
Two of the most important factors regarding your estate is to ensure that you have sufficient liquidity in your estate for the payment of all costs and duties and to ensure that you have a valid, updated will and that your loved ones know where to find it.Download the PDF version of this snippet.