Estate duty is effectively tax that is paid on the transfer of wealth from a deceased estate to the beneficiaries and is levied in terms of the Estate Duty Act of 1955. Estate duty is levied at a rate of 20% of the dutiable amount of an estate up to R30 million, and at 25% of the dutiable amount of the estate where it exceeds R30 million.
But, not all the assets of a deceased are taken into account when calculating estate duty and, while there are no exemptions, there are a number of expenses which can be deducted so as to reduce the dutiable value of the estate.
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In this article, we answer some frequently asked questions about estate duty:
How is it calculated?
The dutiable value of a deceased estate is calculated by adding the value of the deceased’s property, deducting allowable expenses, and then deducting the Section 4A rebate, at which point the estate is then taxed. In practice, however, an estate duty calculation is quite complicated as not all assets are estate dutiable.
What forms part of the dutiable value of a deceased estate?
Estate duty is payable on the worldwide assets of the deceased. Where the deceased was a resident of South Africa at the time of death, all property belonging to that person – together with all property deemed to belong to that person – is included in the estate. The definition of property in terms of the Act includes moveable and immovable property, corporeal or incorporeal property, and all rights or interests in properties.
Corporeal property refers to material, tangible assets such as a vehicle, motorbike, or farm. On the other hand, incorporeal property is that which cannot be perceived by the senses and is intangible, such as patents, copyrights, trademarks etc. The definition of property also includes any lump-sum amounts payable by a retirement fund as a result of the deceased’s death and any property that the deceased was competent to dispose of immediately before their death.
Deemed property refers to any benefit received as a result of the death of the deceased and includes the proceeds of domestic policies on the life of the death (subject to certain exceptions), certain donations, and accrual claims on behalf of the deceased against the surviving spouse. Any living annuity owned by the deceased where no beneficiary has been nominated will be included in the estate.
What about cryptocurrency?
In terms of the Act, crypto assets are regarded as movable, incorporeal property in the estate of the deceased and are included for the purposes of calculating estate duty at fair market value at the date of death. Keep in mind that cryptocurrencies are treated the same as other investments, and are subject to the normal principles of income tax, CGT and estate duty in the event of death.
What property is not included in an estate?
The death benefits in a pension, provident, preservation and/or retirement annuity fund fall within the ambit of the Pension Funds Act (PFA) and are not considered property in a deceased estate. As these benefits are distributed to the deceased financial dependants in accordance with Section 37C of the PFA, the executor does not deal with these assets at all, and the value of these benefits is excluded from the estate duty calculation.
The proceeds of any insurance policies on the life of the deceased where the policy is registered in terms of an antenuptial contract and where the deceased’s spouse and/or children are the nominated beneficiaries do not form part of the dutiable estate. Further, the proceeds of buy-and-sell policies that are paid to a business partner of the deceased for the purposes of funding the purchase of shares from the deceased do not form part of the deceased’s dutiable estate, provided that the policy conforms to the conditions of the Act. Similarly, the proceeds of key person policies do not form part of the deceased’s estate. Any assets held in trust where the deceased is the trust founder do not fall into the deceased’s estate.
Are there any mechanisms to reduce the value of the deceased estate?
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Yes, the Estate Duty Act allows certain expenses to be deducted from the gross value of the estate. These include funeral and deathbed expenses, estate administration costs, valuation fees, certain foreign property, donations made to qualifying Public Benefit Organisations, accrual claims by the surviving spouse, and fees on transfer of property to a surviving spouse, amongst others.
Does the marital status of the deceased affect the estate duty calculation?
The manner in which the deceased was married will have a direct bearing on the estate duty calculation. If the deceased was married out of community of property excluding the accrual, their estate is separate from that of their spouse. However, where the accrual system was included, to the extent that the deceased’s share of the accrual is smaller than that of the surviving spouse, the estate will have an accrual claim against the estate of the surviving spouse and this amount will be included in the estate duty calculation. If the deceased was married in community of property, keep in mind that the joint estate must be wound up and the surviving spouse will have a claim for their half share of the estate once all liabilities have been settled.
How does the Section 4A abatement work?
The Estate Duty Act provides all individuals with an abatement of R3.5 million which is deducted from the net value of the estate for estate duty purposes, meaning that estate duty is only levied on the value of the net estate that exceeds the value of the abatement. If the deceased is the first-dying spouse and elects not to use the abatement, their abatement will roll over to their surviving spouse who will then have an abatement of R7 million in the event of their death. Where the deceased has a pre-deceased spouse, the deceased is entitled to a rebate of R7 million less any amount used by the pre-deceased spouse.
Is it only married couples who qualify for the Section 4A abatement?
No, cohabiting couples and life partners, whether heterosexual or same-sex, can qualify for the abatement for estate duty purposes. In addition, those who are married under tenets of religion also qualify. However, it is important to note that the tax commissioner must be satisfied that the deceased was in a life partnership at the time of death and may require documentation to substantiate this.
Who is responsible for paying estate duty and when must it be paid?
In terms of the Act, the executor of the deceased estate is responsible for paying estate duty. In order to do so, the executor must complete an estate duty return which must be submitted to the Master together with the liquidation and distribution account, and a copy must be submitted to Sars. However, in circumstances where property accrues directly to a beneficiary, such as in the case of a life insurance policy, the beneficiary may be liable for paying a proportionate share of the estate duty over to Sars.
