In recent years, the effect of various taxes on a deceased estate has become more and more important to take into consideration when attending to estate planning prior to the drafting of one’s Will.
This is according to Anica Ungerer, Director in the Wills and Estates Department of Mazars, who provides a brief overview of the most important taxes to consider during the estate planning process. “With Wills Week taking place from 16 to 20 September 2019, these tax considerations will be important to note for anyone who is having a basic Will drafted.”
1. Income Tax
The first tax consideration that Ungerer unpacks is income tax. “When a person dies, the Executors step into the shoes of the deceased and are liable to ensure that all the relevant tax returns of the deceased are completed, submitted and assessed by SARS for payment by the estate, if applicable.”
She explains that prior to 1 March 2016, tax returns would have to be submitted until the deceased’s date of death. “This means that all arrear returns, together with the final return, which would be applicable for the period from 1 March of that particular tax year until the deceased’s date of death, would have to be submitted for assessment.
“Once these tax returns have been formally assessed and paid, the Executors’ responsibility to declare income for the deceased would end in that no further tax returns would have to be lodged by them.”
Any income earned by the estate after the date of death would be taxable in the hands of the beneficiaries, she continues. “This would be in proportion to the shares of the income they are entitled to, and the Executors’ only further responsibility would be to ensure that the beneficiaries are fully informed of their duty to declare the said income and to provide them with the information they would require to properly include the income in their tax returns.”
Unfortunately, SARS found over the years that they were losing out on millions in undeclared income, due to many of the beneficiaries not declaring the income received from an estate, which Ungerer says lead to an amendment to the Income Tax Act.
“The amendment became applicable to all deceased estates where the deceased passed away on or after 1 March 2016. In terms of the amendment, the pre-date-of-death tax position would remain the same for the Executors, but they would now receive a further responsibility. Once the pre-date-of-death taxes have been finalised, the estate would have to be registered as a new tax payer, with the executor once again having to account for all income earned in the estate from the day after date of death.
“This will apply until the Master 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.”
2. Capital Gains Tax (CGT)
Ungerer says that CGT is applicable to a deceased estate as it is 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 would be 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 would now form a part of the applicable post-date-of-death tax returns, and the Executor would have to account for any sales out of the estate in the applicable post-date-of-death tax period, Ungerer explains. “It is important to be aware that there are certain roll over and exclusionary rebates applicable with regards to assets subject to CGT that are to be transferred to a resident surviving spouse,” she adds.
3. Estate Duty
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, says Ungerer. “The duty would then be payable at a flat rate of 20% on the amount in excess of R3.5 million. In the event that the net value of the estate is in excess of R30 million and the deceased passed away on 1 March 2018 or later, then duty would be payable at 20% on the dutiable estate up to R30 million, with 25% duty being payable on the dutiable estate in excess of R30 million.”
When the deceased has a surviving spouse, Ungerer explains that there is an exclusion of all assets bequeathed to the surviving spouse in that there would be no duty 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 would be R7 million (R3.5 million 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,” she adds.
There are many other exclusions that could potentially apply, all of which Ungerer says 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 advisor prior to the drafting of their Will.”
4. Other Taxes
Lastly, Ungerer says there are numerous other taxes that could also potentially affect a deceased estate, such as VAT (Value Added Tax), Donations Tax and the tax surrounding the Section 7C loans by an individual to a Trust. “All of these could potentially have a great effect on a deceased estate one day and should already be considered during the estate planning stage,” she concludes.