Spouses married in community of property (COP) have a joint estate, where their assets and liabilities are equally shared. This includes assets and liabilities that were acquired before the marriage.
In this marital regime, the spouses have an equal and undivided share in the joint estate – and that share is indisputable.
At death, the surviving spouse is only entitled to their share of the estate and not the entirety of it.
The deceased spouse can choose to bequeath their share as they wish.
Should the deceased spouse have a larger estate than the surviving spouse, assets will be transferred to the surviving spouse as they are married in COP. In this instance, or where the deceased bequests a part of or the full share of their estate to the surviving spouse, no capital gains tax (‘rollover relief’ principle) or estate duty (Section 4q of the Estate Duty Act) will apply.
This is only true for South African assets.
Should offshore assets be involved, then it would depend on where those assets are domiciled and the rules of that jurisdiction.
The ‘rollover relief’ principle allows the estate to defer paying capital gains tax (CGT) when transferring the capital assets to the surviving spouse.
The surviving spouse will then inherit the assets with the original base cost, and when CGT is triggered in the future, the original base cost will be applicable when calculating CGT. Simply put, it is viewed as if the surviving spouse steps into the shoes of the deceased, as the owner of the assets, with regard to the history of the asset.
The Section 4(q) deduction is a leniency provided to spouses when assets are transferred from one spouse to the other due to death. It allows assets that are bequeathed to the surviving spouse to be exempt from estate duty. This benefits the deceased’s estate by reducing the estate duty payable by the estate.
When assets aren’t transferrred to the surviving spouse
As mentioned, the deceased spouse may distribute their share of the joint estate to third-party beneficiaries such as children, relatives, trusts and so on.
When leaving assets to third-party beneficiaries, the deceased estate becomes liable for all applicable taxes.
In this instance, the estate will be liable for CGT on all capital assets. This excludes personal use items such as motor vehicles, jewellery, household contents (furniture), antiques, artwork, yacht/boat (not exceeding 10 metres in length), and so on. Personal use items are exempt from CGT because they are viewed as assets used for personal enjoyment rather than trade. Therefore, their sale or transfer does not trigger CGT.
There is also the R2 million exclusion on the gain of a primary residence. The R2 million exclusion is an exclusion on the asset itself. Therefore, for spouses married in community of property, a maximum of R1 million can be excluded from the gain of the primary residence.
Another exclusion is the R1.8 million small business exclusion, applicable to businesses with a value not exceeding R10 million. Certain requirements must be met for this exclusion to apply.
For estate duty purposes, the deceased estate will not enjoy the Section 4(q) deduction benefits. All the assets bequeathed to third-party beneficiaries will be subject to estate duty.
Should the deceased spouse’s gross estate exceed R3.5 million, 20% estate duty will apply. If the dutiable estate exceeds R30 million, 20% will be applied on the first R30 million, and 25% will be applied on the value of the estate exceeding R30 million.
In conclusion, the share belonging to the surviving spouse is indisputable, but this does not automatically entitle them to the entire estate. The deceased spouse has the freedom to distribute their share of the joint estate as they wish, taking into consideration the tax implications that will be applicable. Assets inherited by the surviving spouse will be exempt from CGT and estate duty.
Marital regimes impact the way assets are distributed on death. It is worthwhile to consult with a professional who can prepare an estate plan. This will provide clarity on the distribution of assets. It will also detail the tax implications and how to minimise tax, thus ensuring that the wealth you have created during your lifetime is protected.