The often-quoted phrase “nothing is certain except death and taxes” is crucial for estate planning. South African residents with local and offshore assets need to understand the tax obligations that will arise at their death. Unfortunately, many testators are unaware that taxes like income tax, estate duty, capital gains tax, and potential foreign taxes can significantly reduce their estate’s value and complicate the administration process. Understanding these tax obligations is a must for protecting your financial legacy and minimising unexpected costs and delays in the transfer of wealth to your beneficiaries.
Income Tax
The passing of a South African resident triggers a range of tax consequences, starting with the assessment of income tax. One of the lesser-known realities is that a deceased person’s tax obligations do not terminate upon death. The executor of the deceased estate assumes the responsibility of finalising all outstanding tax affairs, and this includes filing any unsubmitted tax returns, obtaining the necessary tax certificates, and settling all taxes owing to the South African Revenue Service. Since 2016, executors have been required to perform two separate tax assessments:
1. The pre-date of death assessment: Accounts for income and deductions up to the date of death.
2. The post-date of death assessment: Accounts for income earned by the estate during the administration period, such as interest, dividends, or rental income.
Capital Gains Tax (“CGT”)
For purposes of CGT, death is considered a disposal event under the provisions of the Income Tax Act 58 of 1962 (“Income Tax Act”). This means that all assets in the deceased’s estate are deemed to have been disposed of at market value on the date of death. This deemed disposal gives rise to CGT implications, which must be accounted for by the executor in the final tax return. The capital gain is calculated on the difference between the base cost of the asset and its market value at death, and the tax is paid by the estate before distribution of the balance of the estate to heirs. The Income Tax Act provides a once-off exclusion of R300,000 in the year of death, meaning that the first R300,000 of capital gains will not attract tax; however, any amount thereafter is subject to an inclusion rate of 40%, taxed at the deceased’s marginal rate.
Some assets are excluded from CGT altogether, including personal use assets such as vehicles, household goods, and cash. Similarly, the proceeds of domestic life insurance policies and the full value of retirement fund benefits are exempt. CGT relief also applies where assets are bequeathed to a surviving spouse, and in these cases, the tax is rolled over, and the surviving spouse inherits both the asset and its base cost. Furthermore, if the deceased owned a primary residence, the first R2 million of capital gain on the disposal of that property is also exempt from CGT.
Estate Duty
Estate duty is another key tax consideration governed by the provisions of the Estate Duty Act 45 of 1955 (“Estate Duty Act”) and levied on the dutiable value of the deceased estate. The current estate duty rate is 20% on the first R30 million and 25% on the value exceeding that threshold. South African estate duty applies not only to South African assets but also to all foreign assets owned by South African residents at the time of death. This means that even if the deceased owned immovable property or investments abroad, those assets will be included in the calculation of estate duty unless exemptions apply.
An initial abatement of R3.5 million is available, and if the deceased is survived by a spouse who inherits the estate, this abatement can be rolled over, providing a potential R7 million exemption on the death of the surviving spouse. Assets bequeathed to a surviving spouse are not subject to estate duty under the provisions of section 4(q) of the Estate Duty Act, and similarly, any bequests made to registered public benefit organisations or qualifying charities are exempt.
Notably, retirement funds, including pension, provident, and retirement annuity funds, do not form part of the deceased estate and are thus excluded from estate duty calculations. This makes retirement vehicles an effective tool for estate planning, particularly for reducing estate duty exposure. Life insurance policies are commonly used to provide liquidity in an estate, but it is important to understand their tax implications. Where the estate is nominated as the beneficiary, the proceeds of the policy are included as deemed property in the estate and therefore subject to estate duty and executor’s fees. That said, if the policy is structured correctly, such as where the proceeds are payable to a surviving spouse or to a business partner under a valid buy-and-sell agreement, the proceeds may be excluded from the estate duty calculation.
Donations Tax
Donations Tax is only applicable when assets from an estate are donated to another party. Any such donation is subject to Donations Tax levied at 20% for the first R30 million and 25% for amounts above that, with an annual exemption of R100,000 available to natural persons. The estate is primarily liable for the Donations Tax, but should the estate not make the necessary Donations Tax payment, the person who received the donation becomes jointly and severally liable for the Donations Tax with the deceased estate.
Offshore Assets & Considerations
Where the estate includes offshore assets, additional complexities arise as the South African estate duty regime applies to the worldwide assets of residents, regardless of where the assets are situated. However, many foreign jurisdictions, particularly those with situs-based taxation systems, also impose situs, estate or inheritance taxes on assets located within their borders. Without careful planning, this can result in double taxation. South Africa has entered into several double taxation agreements with foreign countries, some of which contain provisions to avoid or mitigate double estate duty. However, these agreements vary significantly, and not all of them apply to inheritance or estate taxes. It is therefore imperative to consult with an advisor familiar with both South African tax law and the foreign jurisdiction’s legal and tax framework.
Another practical issue associated with offshore assets is probate. Many countries do not recognise South African letters of executorship, meaning that a separate legal process, often referred to as probate, must be followed in the foreign jurisdiction before those assets can be transferred to the beneficiaries. This process may involve appointing a local attorney in that jurisdiction, translating documents, and complying with foreign legal requirements, all of which can delay the administration of the estate and incur additional costs. To mitigate these issues, it is advisable to draft a separate will for assets held in a foreign jurisdiction. However, care must be taken to ensure that the South African and foreign wills are coordinated and that one does not inadvertently revoke the other.
In conclusion, effective estate planning requires more than just drafting a will. It demands a careful assessment of your entire asset base and understanding of the tax consequences that arise on death. The structure and ownership of assets, the jurisdictions in which they are held, and the beneficiaries involved all influence the overall tax exposure of the estate. With the right legal and fiduciary guidance, it is possible to minimise tax liabilities, avoid administrative complications, and ensure that wealth is transferred efficiently and in accordance with your wishes.
Disclaimer: This article is the personal opinion/view of the author(s) and does not necessarily present the views of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever, and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken based on this content without further written confirmation by the author(s).
Source: SeymoreDuToit & Basson
