In recent years it has become increasingly important to take into account the impact of tax on a deceased estate when attending to estate planning before drafting a will.
In light of National Wills Week, which runs from September 16 to 20, these tax considerations are important to note for anyone who is having a basic will drafted.
There are four important things to consider:
Income tax. When a person dies, the executor steps into the shoes of the deceased and is liable to ensure that all the relevant tax returns of the deceased are completed, submitted and assessed by South African Revenue Service (Sars), and the estate must pay tax, if applicable.
Before March 1, 2016, tax returns had to be submitted only until the deceased’s date of death. All arrear returns, together with the final return, which was applicable for the period from March 1 of that particular tax year until the deceased’s date of death, have to be submitted for assessment. Once these tax returns had been formally assessed and paid, the executor’s responsibility to declare income for the deceased ended; the executor did not have to lodge any further tax returns.
Any income earned by the estate after the date of death is taxable in the hands of the beneficiaries. This is in proportion to the shares of the income to which they are entitled, and the executor’s responsibility is to ensure that the beneficiaries are fully informed of their duty to declare the said income and to provide them with the information they require to include the income in their tax returns.
However, Sars found that, over the years, it was losing out on millions of rands in undeclared income, because many beneficiaries did not declare the income received from an estate. This led to an amendment to the Income Tax Act. The amendment became applicable to all deceased estates where the deceased passed away on or after March 1, 2016.
In terms of the amendment, the pre-date-of-death tax position remains the same for the executor, but the executor now has a further responsibility. Once the pre-date-of-death taxes have been finalised, the estate has to be registered as a new taxpayer, and the executor has to account for all income earned in the estate from the day after date of death.
This applies until the Master of the High Court has formally approved the liquidation and distribution account of the estate, which is generally accepted to be the expiry date of the Section 35 advertisement of the liquidation and distribution account.
Capital gains tax (CGT) applies to a deceased estate as it does to individuals, with one exception to the general rule.
The exception is that death is regarded as a deemed disposal of assets that are subject to CGT, such as immovable property, shares and unit trusts. The executor is responsible to declare the deemed disposal of all these assets in the final tax return of the deceased, with any tax payable being a liability in the estate and therefore deductible for estate duty purposes.
Any post-date-of-death sales form a part of the applicable post-date-of-death tax returns, and the executor has to account for any sales out of the estate in the applicable post-date-of-death tax period.
It is important to be aware that certain roll-over and exclusionary rebates apply with regard to assets subject to CGT that are to be transferred to a resident surviving spouse.
Estate duty becomes applicable where the net value of a deceased estate is in excess of the individual estate duty rebate of R3.5 million.
The duty is payable at a flat rate of 20 percent on the amount in excess of R3.5m. If the net value of the estate is in excess of R30m and the deceased passed away on March 1, 2018 or later, duty is payable at 20 percent on the dutiable estate up to R30m, with 25 percent duty payable on the dutiable estate in excess of R30m.
When the deceased has a surviving spouse, there is an exclusion of all assets bequeathed to the surviving spouse in that no duty is applicable to assets awarded to the surviving spouse. There is also a portable spousal abatement that applies on the death of the last dying, in which case the estate duty rebate is R7m (R3.5m x 2), less the amount deducted from the net value of the estate of any one of the previously deceased spouses as dictated by the section.
Where the deceased is a surviving spouse of one or more marriages, the amount subtracted is limited to one predeceased spouse.
Many other exclusions could apply, all of which should be taken into consideration during the estate planning process. Calculating estate duty correctly is a complex process with many factors having an influence on the calculation, and it is important that all of these are looked at very carefully by the testator and their adviser prior to the drafting of their will.
Other taxes. There are a number of other taxes that could potentially affect a deceased estate, such as value-added tax, donations tax and the tax surrounding the Section 7C loans by an individual to a trust. All of these taxes could have a significant effect on a deceased estate and should be considered during the estate planning stage.
Anica Ungerer is a director in the wills and estates department of Mazars.
PERSONAL FINANCE