Estate duty is levied in terms of the Estate Duty Act 1955 on the dutiable amount of a deceased person’s estate. Estate duty taxes the transfer of wealth or assets from the deceased’s estate to the beneficiaries. With effect from March 1 2018, this duty is levied at 20% on the dutiable amount of an estate that does not exceed R30 million, and at 25% on the dutiable amount of the estate value exceeding R30 million.

Simplistically, 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. In terms of legislation, the deceased estate of a person ordinarily resident in South Africa includes his worldwide assets, meaning all property and deemed property situated both in and outside of South Africa. Where the deceased was not ordinarily resident for tax purposes in South Africa, any foreign assets are excluded from his dutiable estate.

Property included in the dutiable estate

In terms of Section 3(2) of the Estate Duty Act, dutiable property includes any right in or right to property whether moveable or immoveable, corporeal or incorporeal. Corporeal property refers to any property that is tangible and has substance, such as land or a vehicle – in other words, the right of ownership in a material thing. This includes both real rights and personal rights, such as a usufruct over a property. On the other hand, incorporeal property is the right to ownership in an intangible asset which is protected by law, such as copyrights, brand identity, trademark, or intellectual property. Dutiable property also includes deemed property in the deceased estate which refers to any benefit received as a result of the death of the deceased. Deemed property therefore includes domestic policies on the life of the deceased (subject to certain exceptions), certain donations, and accrual claims on behalf of the deceased against his surviving spouse. Where no beneficiary has been nominated on a living annuity, the proceeds will be paid into the estate and are subject to estate duty.

Property excluded from the dutiable estate

Pension, provident and retirement annuity funds are not considered property as they do not fall into the deceased estate and therefore not dutiable. Where the deceased has nominated beneficiaries on his living annuity, these proceeds will be awarded directly to the nominated beneficiaries and therefore do not fall into the deceased’s estate and are also not dutiable.

The proceeds of insurance policies on the life of the deceased that are registered in terms of an ante-nuptial contract where the deceased’s spouse or children are nominated as 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.

In addition, any assets held in trust – whether inter vivos or mortis causa – do not fall into the estate of the deceased and do not attract estate duty. As such, trusts can make excellent estate planning tools especially to house growth assets intended for use by subsequent generations. 

Estate duty and your matrimonial property regime

The matrimonial property regime under which a person is married will naturally impact on the estate duty calculation. Where a couple is married in community of property there is only one estate. This means that should one spouse die, the entire estate must be wound up following which the surviving spouse has a 50% claim to their share of the joint estate. Funeral costs and estate duty are paid for from the deceased’s share of the joint estate. Where a couple is married with the accrual system, the spouse with the smaller accrual has a claim against the other spouse’s estate. This means that if the first-dying spouse has the smaller accrual, their estate will have a claim against the surviving spouse’s estate for their share of the accrual. This accrual claim is considered deemed property in the deceased’s estate and is dutiable.

Allowable deductions

Once the gross value of the deceased estate has been determined, the executor will subtract any allowable deductions in order to determine the net value of the estate. These may include:

• Funeral costs and deathbed expenses.
• The liabilities of the deceased at the date of death, including capital gains tax that arises on death.
• Estate administration costs.
• Valuation fees.
• Certain foreign property.
• Bequests to qualifying Public Benefit Organisations.
• Claims in terms of the Matrimonial Property Act.
• Fees on transfer of property to a surviving spouse.
• Assets inherited by the surviving spouse.

The Section 4A abatement

Once the net value of the estate is determined, the Section 4A deduction of R3.5 million may be applied. Keep in mind that where the deceased leaves behind a surviving spouse, the abatement can be rolled over for use by the last-surviving spouse which will provide her with up to a R7 million estate duty abatement. Estates worth less than R3.5 million do not attract estate duty. For the purposes of estate duty, a ‘spouse’ includes any person in a marriage or customary union, unions recognised as marriages under tenets of religion, and same-sex or heterosexual unions which the commissioner is satisfied are intended to be permanent.

Once the executor has determined the estate duty payable by the deceased estate, he is required to submit an estate duty return and the Liquidation and Distribution account to both Sars and the Master. Generally speaking, the executor is responsible for paying the estate duty from the estate. However, in circumstances where property of the deceased accrues to another person – such as where a policy was paid directly to a beneficiary – then that person becomes responsible for paying over any applicable proportional share of the estate duty to Sars. Estate duty becomes due for payment within one year from the date of death or 30 days from the date of assessment, and currently interest of 6% per year is levied on late payments – although extension can be applied for in certain circumstances. 

Article credit https://www.moneyweb.co.za/financial-advisor-views/calculating-your-estate-duty/