Finance Minister Trevor Manuel has made it a little cheaper to die. Death is a taxable event, with both estate duty and capital gains tax (CGT) being applied. Manuel has proposed reducing both taxes.
Estate duty
Estate duty is levied on the total value of all assets in your estate at the time of death after the deduction of your liabilities (debts).
The first R2.5 million in value (up from R1.5 million) is exempt from estate duty. Assets bequeathed to a spouse are not subject to estate duty.
Manuel also announced that legislation is to be enacted to overcome a recent High Court decision in which it was decided that the South African Revenue Service may not collect estate duty from the executor of a deceased estate for property which is not under the direct control of the executor.
Capital gains tax
Death is an event that triggers CGT. For the purposes of CGT, death is considered to result in the disposal of assets. When you die, 25 percent of any capital gain made on the disposal of your assets (those that are subject to CGT) will be taxed at your marginal rate of income tax in the year of death, with the exclusion of the first R60 000 (up from R50 000).
A capital gain is calculated by subtracting the acquisition value of an asset (or its value at October 1, 2001 when CGT was introduced) from the value at the time of death.
Any capital loss is deducted from the overall capital gains.
Your estate is also subject to other exemptions, such as the R1.5 million (up from R1 million) excluded from any capital gain on your primary residence. Assets bequeathed to a spouse are not subject to CGT. The government is also considering allowing an exemption for a swap of bequeathed assets involving a spouse. For example, currently if one heir inherits a house and the spouse inherits shares, the house currently is subject to CGT if the spouse swaps the shares for the house.
Donations tax
Another estate planning mechanism that has been changed in your favour is the value of assets you can donate in any one year without attracting donations tax.
Manuel has increased this amount from R30 000 a year to R50 000 a year.
If you do not use the donations tax exemption in a particular year, you lose it.
There are two ways in which donations are useful in estate planning:
- You can transfer ownership of assets to dependants/heirs at a rate of R50 000 a year. This means that at death the transferred (donated) assets will not be included in your estate and will not be subject to estate duty.
- You can use the exemption to make tax-free donations to discharge a loan made to a trust to enable it to pay for assets you have transferred to the trust. Any loan to a trust is an asset and is subject to estate duty at death.
Health warning
You should always make provision for the payment of estate duty and capital gains tax at death in your financial plan. If you do not, assets may have to be sold at discounted prices to pay the Receiver of Revenue. If you do not have liquid assets to pay the Receiver, you need to consider taking out additional life assurance, which will pay out on your death.