An understanding of tax and its effect on deceased estates

Income tax:-
It is important to note that an individual who was liable for the completion and submission of Provisional Tax prior to death will no long be liable to submit these returns after death. The estate will be responsible only for the normal annual income tax returns and no Provisional Tax returns need to be submitted after an individual has passed away.

The next important aspect of income tax to mention is the two sets of tax rules that apply – the one set to individuals who passed away prior to 1 March 2016 and individuals who passed away after 1 March 2016.

Up and until 1 March 2016 the Executor in a deceased estate was only responsible for the completion and submission of income tax returns (which would have included Capital Gains Tax – CGT – as may have been applicable in each tax year) up to date of death. The Executor would have had to account separately for any CGT applicable to post date of death sales of CGT related assets, at which point the executor’s tax responsibility ended.

The income tax flowing from income earned after date of death would be for the heirs in the estate to reflect in their own tax returns with the Executor having the responsibility to ensure the heirs are aware of the amounts to be accounted for in their tax returns and the fact that they were obliged to declare that income.

SARS, however, found over the years, that they were losing out on millions in income tax, due to many heirs not reflecting the income in their tax returns for whatever their reasons may have been.

Due to the above, the entire income tax position changed quite dramatically after 1 March 2016.

SARS amended legislation in 2016 which changed the position to one where the Executor now receives a lot more responsibility out of a tax point of view in that that they would not only be responsible for the income tax (inclusive of CGT as and where applicable) to date of death. In addition to the existing duty they would now also have to register the estate as a separate / new tax payer thereafter and complete and submit tax returns for all taxable income earned within the estate (with an annual R23,800.00 interest exemption being applicable). These returns would have to be submitted until the finalisation of the estate. The CGT that the executor would have previously accounted for on post-date of death sales would no longer have to be dealt with separately, but would now form a part of the applicable tax return for the year in which the asset was sold.

This change ensured that SARS was placed in a position where it could keep track of income earned as this has to be declared by the actual Executor by law. Simultaneously it placed SARS in a position to physically collect the tax due on this income prior to finalisation of the estate, with the Executor requiring tax declarations from SARS proving that both the pre-and-post date of death taxes have been satisfactorily finalised before the Master of the High Court would be willing to provide them with a filing slip (basically a written confirmation that the estate is finalised).

Unfortunately, this change in position has caused the general estate administration process, which is already a lengthy and time-consuming exercise, to be delayed for an even longer period of time and whilst the processes have become easier to comply with since the law was amended, it does remain problematic at times.

Capital Gains Tax:-
Capital Gains Tax (CGT) would be applicable in any estate where the deceased held assets to which this tax applies. The main assets being affected by this being immovable property, shares/unit trusts and business interests (note that the above is not a complete list of assets subject to CGT).

Death itself is deemed as a CGT disposal of assets and thus in the deceased’s final tax return this deemed disposal of CGT related assets would have to be reflected.

The exception to the rule in this particular instance is if the asset subject to CGT is bequeathed to a resident surviving spouse. Should this be the case then there is a rollover of the capital gain to the estate of the surviving spouse and thus the deemed disposal falls away, with the surviving spouse taking the asset over at the base cost at which the deceased obtained it (and not at the date of death value of the deceased). Note that this rollover does not apply to a non-resident surviving spouse and would also not be applicable if the CGT related asset bequeathed to the spouse is sold out of/by the estate after death (in which case the calculations related to both the deemed and actual disposals would have to be calculated and declared by the executor in the respective tax year).

In the cases where the rollover to a surviving spouse is not applicable there could potentially be two separate CGT calculations involved, with the first being the deemed disposal of the asset as at date of death, and the second being an actual disposal of the asset in the event that it is sold by the estate. As indicated under the income tax heading, the CGT calculation on an actual sale of asset by the estate is no longer attended to on its own, but now rather forms a part of the tax return in the year in which the sale occurred.

Note that there are exclusions that can be claimed, for example for a primary residence there would be an exclusion of R2 million available as well as in the year of death where the normal exclusion available to an individual or natural person (in the amount of R40,000 per annum) is increased to R300,000 for that particular tax year. There are also other exclusions that could potentially be applicable but may not be listed in this article.

Estate Duty:-
Currently Estate Duty is levied at the rate of 20% on the net asset value in an estate that exceeds R3.5 million, with an estate where the said net asset value exceeds R30 million, being liable for 25% estate duty on the balance exceeding R30 million (applicable from 1 March 2018).

Net estate generally refers to the gross assets in the estate, plus all deemed assets, less liabilities and all other allowable deductions, with the dutiable estate being the net estate less the allowable Section 4A deduction, currently being R3,5 million per individual.

Subject to certain limitations or restrictions, where assets are bequeathed to a surviving spouse, a rollover (similar to the rollover applicable with regards to CGT but in this instance also applicable to a non-resident surviving spouse) would apply. This basically means that the value of assets bequeathed to a surviving spouse, for which deductions have not been claimed elsewhere, is deductible provided that the deduction allowable shall be reduced by the amount awarded to any individual or Trust other than the spouse. The benefit would also not be applicable in the event that assets are left to a Trust for the benefit of the spouse, but with discretion being awarded to the Trustees to allocate such asset or income therefrom to any person other than the surviving spouse. The terms of the Trust is therefore essential in establishing whether the bequest to the Trust is deductible or not.

As mentioned above, generally each individual has an estate duty rebate of R3.5 million available. Where the deceased was the spouse of one or more previously deceased persons, the amount that can be deducted from the net estate increases to R7 million, less the amount deducted from the net value of the estate of any one of the previously deceased persons (spouses). It is important to note where the deceased is the surviving spouse of more than one marriage, then the amount that can be deducted is limited to one predeceased spouse with the choice of which spouse being that of the executor.

Note that there are many other estate duty deductions available and these are set out in Section 4 of The Estate Duty Act, one of these being assets awarded to charities (they have to be registered with SARS as a PBO to be recognised as a charity for this purposes).

Estate duty becomes due and payable to SARS within one year of the date of death or within 30 days of receipt of the estate duty assessment. If the estate duty is not paid within that period SARS would be entitled to levy interest on the estate duty payable on assessment. The current interest rate per annum that is used for this purpose is 6%. Whilst an Executor has the right (and duty) to pay a reasonable deposit to the satisfaction of the SARS Commissioner within one year of death and may then request an interest free extension on the payment of any balance of estate duty, it is important to note that SARS does not have to grant the request and, if they decline the request, the full balance of the duty (estimate as it may be at that point in time) would have to be paid to them to ensure interest will not be charged. It is important to be aware that, should the estate duty be a higher amount at assessment date, interest would still apply to the balance. It is therefore very important to remain aware of estate duty and for the Executor to check and calculate as far as possible, before the one year anniversary of death occurs, whether it would be necessary to pay a reasonable deposit and request an interest free extension on the payment of any balance.

Another important aspect to mention which could cause potential problems at the end of the estate when the estate duty can be properly and correctly calculated, is the question of life policies (note that there are, once again, some exceptions to the rule), the potential estate duty thereon and the responsibility for the payment of this estate duty. In broad speaking terms life policies would be regarded as deemed assets for estate duty purposes even if they paid directly to beneficiaries outside of the estate. This means that the policy was never a physical asset in the estate, but rather paid out to a spouse, child or other nominated beneficiaries shortly after death. The Executor would have a duty to ascertain the value of the policy and to whom it was paid and to include it in estate duty calculation as a deemed asset. In the event that the estate is dutiable the duty attributable to that policy would potentially have to be apportioned between the estate and the individual who received the policy proceeds. This basically means that, even though the individual in question may not be a beneficiary of the estate itself, they could potentially be responsible for a portion of the estate duty as would be attributable to the policy proceeds they received. Whilst SARS would ultimately hold the Executor and estate responsible for ensuring that the full estate duty is paid to them, it would in turn be the responsibility of the Executor to ensure that they collect the amount or portion of duty for which the beneficiaries of the policy would be responsible. This particular matter can in certain instances become problematic as the final estate duty is normally only calculated at the end of the process and this can in certain instances be 12-18 months or more after an individual passed away with the life policy having been paid out to the beneficiaries many months prior to that, thus potentially leaving the beneficiaries poor of cash to contribute the duty for which they are responsible. It is therefore quite important to try and make those beneficiaries of life policies aware of the fact that they may potentially be responsible for a part of the estate duty at the outset of the process (as far as that may be possible at the time).

Conclusion:-

Although there are other taxes, such as VAT that could potentially be applicable to a deceased estate, income tax, CGT and estate duty are the main and most important ones to consider. The emphasis in this instance being that during the estate planning stage, which is cardinal to the process of having a Will drafted, these taxes should already be considered and estimates calculated if possible at that time, to ensure that the administration of the estate one day runs as smoothly and efficiently as possible. Due to the ever changing tax position, it is also important to review your Will on a regular basis to ensure it remains tax efficient.

19/08/2021