Estate duty: Understanding your liability and planning ahead

Determining your estate duty liability is a key component of effective estate planning as it enables you to identify potential shortfalls and implement strategies to address them proactively.

In South Africa, beneficiaries who receive inheritances, whether through testate or intestate succession, do not pay inheritance tax. This is because an inherited asset is regarded as a capital receipt and is not included in the taxpayer’s gross income. Instead, the deceased estate itself is liable for estate duty before assets are transferred to beneficiaries.

Here’s what to know:

Understanding estate duty

Estate duty, which is levied in terms of the Estate Duty Act, is payable at a flat rate of 20% on the net value of a deceased estate up to R30 million. To the extent that the net value of the estate exceeds R30 million, a flat rate of 25% is levied.

In order to determine your estate duty liability, you will need to calculate the value of all your property and subtract the allowable deductions and expenses to arrive at a net estate value, which, depending on the value, may be subject to estate duty.

That said, understanding what assets fall within the definition of property and what deductions are allowable is key to determining your estate’s net value. Further, understanding the extent to which your matrimonial property regime impacts these calculations is key to getting your numbers right.

What constitutes property?

According to Section 3(2) of the act, estate duty is payable on all property you own, which includes movable and immovable assets, as well as corporeal and incorporeal property.

Corporeal property comprises tangible assets such as homes and vehicles, while incorporeal property includes intangible rights like servitudes and leases over immovable property. If you are an ordinary resident of South Africa, property refers to your worldwide assets.

Deemed property

You will also need to include the value of all deemed property in your estate, i.e. those assets which do not exist at the date of death but which will come into fruition in the event of your death, such as life insurance policies and pension payouts.

It’s important to note the following regarding deemed property:

• Deemed property includes the proceeds of domestic insurance policies taken out on the life of the deceased. However, where the proceeds are payable to the surviving spouse in terms of a registered ante-nuptial contract, no estate duty is payable. Similarly, the proceeds of correctly structured business assurance policies are exempt from estate duty.
• Benefits from approved retirement funds – pension, provident, preservation, or retirement annuity funds – are not deemed property and are thus excluded from your estate duty calculation.
• For spouses married under the accrual system, accrual claims payable to the deceased estate constitute deemed property.
• Where donations arise as a result of a person’s death, referred to as donatio mortis causa, such donation is exempt from donations tax, although the value will be included for estate duty purposes. To qualify as a donatio mortis causa, the transfer of ownership must be contingent on the death of the deceased, must be executed in terms of the will, and must be accepted by the donee prior to death.

Allowable deductions

Several deductions under the Estate Duty Act reduce the taxable value of your estate, including:

• Section 4(a): Reasonable funeral expenses, tombstone costs, and medical and burial expenses, including advertisements and cremation fees.
• Section 4(b): Outstanding debts, including taxes due to Sars (e.g., income tax and capital gains tax).
• Section 4(c) and (d): Administration expenses, including executor’s fees, Master’s fees, estate bank account charges, transfer fees, valuation fees, and bond cancellation costs.
• Section 4(h): Bequests to approved public benefit organisations (PBOs), as stipulated in Section 18A of the Income Tax Act.
• Section 4(q): Assets left to a surviving spouse are exempt from immediate estate duty, deferring duty until the spouse’s death. This exemption includes life insurance proceeds payable to the surviving spouse.

Section 4A abatement

Once you have determined the net value of your estate after subtracting the allowable deductions as listed above, you will need to apply the R3.5 million abatement provided in terms of Section 4A of the act. In terms of this section, estate duty will only be charged on the net value of your estate, which exceeds this abatement.

If you are the first-dying spouse, this abatement can be rolled over to your surviving spouse, who will then have up to a R7 million abatement in the event of their death, meaning that up to the first R7 million net value of their estate will be free from estate duty.

Having said that, keep in mind that bequeathing assets to your surviving spouse has the effect of lowering the value of your estate while increasing the value of theirs. It is therefore important to ensure that each of you has an estate plan developed to fully understand the estate duty implications for each estate.

To qualify for this abatement, you and your spouse will need to qualify as spouses in terms of the Act. In this context, a ‘spouse’ includes any recognised marriage or customary union, unions recognised as marriages under tenets of religion, and those married in terms of the Civil Union Act. It may also include same sex or heterosexual unions which the Commissioner is satisfied are intended to be permanent.

Estate planning strategies

Keep in mind that a central focus of estate planning is to reduce your estate duty liability, which can be achieved in a number of ways:

• Retirement products: Contributions to approved retirement funds are estate-duty-free, providing tax-efficient methods to transfer wealth.
• Inter vivos trusts: Assets transferred into trusts during your lifetime, provided they are correctly structured, fall outside of your estate and, as such, can significantly reduce your taxable estate.
• Donations: Utilising your annual donations tax exemption, currently R100 000 per year per individual, can systematically reduce your estate size.

When used appropriately, the above tools can help you manage your estate duty liability and ensure that your beneficiaries receive maximum benefits from your estate.

Calculating your estate duty liability is crucial for ensuring your beneficiaries are not left financially burdened by unexpected taxes.

Regularly reviewing your estate plan, staying abreast of legislative changes, and working closely with an experienced estate planner will help you structure your assets optimally and minimise your estate’s tax burden.