Tax liabilities in your deceased estate

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Understanding the taxes your deceased estate will be liable for is an essential part of the estate planning process and ignoring your tax obligations can harm the liquidity of your estate and therefore the financial legacy of your relatives.

According to our legislation, those who inherit a deceased estate are not liable for property tax. An inherited property is a capital receipt and is not included in the taxpayer’s gross income. Thus, no inheritance tax is due by the person receiving the inheritance but rather by the deceased estate.

The deceased must therefore consider several potential liabilities which may include:

Inheritance rights

Inheritance tax is essentially inheritance tax payable by the estate of the deceased for the transfer of the assets of his estate to his heirs or assigns. In accordance with Section 4A of the Inheritance Tax Act, an allowance of R3.5 million will be deducted from the net value of your deceased estate, meaning that an amount equal to this allowance will not be subject to inheritance rights. If you are married, you can transfer your relief of R3.5 million to your surviving spouse who will then benefit from an effective relief of R7 million in the event of death if your spouse is the sole beneficiary of the estate. As things stand, your estate will be liable for inheritance tax to the extent that the net value of your estate exceeds this relief at a flat rate of 20% on the first R30 million. Subsequently, inheritance tax will be levied at the rate of 25%.

One of the main functions of your executor will be to calculate your inheritance tax liability, which they will effectively do by adding the value of your property and the deemed property, then deducting allowable expenses and exclusions. as set out in the Act. Remember that when calculating the value of your estate, your executor must consider assets located both in South Africa and overseas. In the context of the Act, property is a broad term that includes movable and immovable property, tangible and intangible property, and personal rights such as easements over property. It also includes deemed property such as proceeds from family life insurance policies, subject to several exceptions, and claims payable on your surviving spouse’s estate.

From the gross value of your assets, your executor will be entitled to make certain permitted deductions which are set out in section 4 of the Act, including funeral, headstone and deathbed expenses, administration and debt. Once the net worth of your estate has been established, your executor may deduct the Section 4A abatement mentioned above to determine the taxable amount of the estate.

Income tax

Bearing in mind that your tax liabilities follow you to the grave, one of your executor’s primary duties will be to settle your tax affairs with Sars, including any prior tax years where your affairs are not were not in order. For income tax purposes, your worldwide income will be subject to income tax in South Africa.

Remember that starting in 2016, your executor will need to file a pre-date of death valuation as well as a post-date of death valuation. The pre-date of death valuation will include all dividends, interest and rental income earned by your estate until the expiration of the liquidation and distribution account announcement. Any income earned by your deceased estate thereafter until your estate is finalized must be deposited in your post-date valuation.

To determine the income tax payable by your estate, your executor must take into account all local and foreign income, investment and rental income, income from trade and agriculture, and income of the trust. Professional accounting fees incurred by your deceased estate to complete your tax returns may be considered an allowable deduction.

Capital gains tax

Capital Gains Tax (CGT) is another form of tax that should be considered when reviewing the liabilities of your deceased estate because, more importantly, your death will trigger a capital gains event. In the event of your death, you will be deemed to have disposed of your property for an amount equal to its market value on the date of your death. Remember that capital gains tax is levied on gains realized on the sale or transfer of property deemed to have taken place on your death. Whether you die with a valid will in place or intestate laws apply, the bottom line is that your assets will be transferred to another person upon your death, which in turn will result in an event capital gain.

Remember that CGT is governed by the Income Tax Act and all taxes owed to Sars by your deceased estate must be paid before the executor can distribute any inheritance to your heirs. That said, Section 4 of the Inheritance Tax Act makes it clear that any debt owed in your estate – including any debt owed to Sars – is deductible for inheritance tax purposes. The Income Tax Act provides for a one-time exclusion from CGT of R300,000 in the year of your death, which means that the first R300,000 of the gain realized on your deceased estate will not be taxed. Any winnings made above R300,000 will be included for CGT purposes at a rate of 40% and will be taxed at your marginal tax rate, subject to certain exclusions.

For example, any assets you bequeath to your surviving spouse will be excluded for CGT purposes, as well as the first gain of R2 million on the sale of your principal residence. Similarly, personal-use assets such as cash, retirement funds and motor vehicles are also excluded for CGT purposes.

Keep in mind that your executor will effectively be your representative when it comes to finalizing the tax affairs of your estate and, as can be seen from the above, this can be a complex process. We advise you to undertake a thorough tax planning exercise as part of your estate planning to ensure that your executor is not unnecessarily burdened with incomplete tax matters and complications.

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