Tax and deceased estates

I, personally, was quite grateful that estates as a whole were, mostly unaffected by the budget speech this year. Be that as it may, this time of the year always presents itself as a good opportunity to review the tax implications as it relates to deceased estates and general estate planning.

There are a few taxes that affect estate planning and deceased estates with the most important of those being, income tax, capital gains tax (CGT) and estate duty. A brief explanation of the effect of these taxes on a deceased estate is explained here below and these effects should also be considered when one attends to your estate planning prior to the drafting of your Will.

INCOME TAX

Up and until 1 March 2016 the Executor in a deceased estate was only responsible for the income tax (inclusive of CGT) submissions up to date of death and the submission of any CGT for post date of death sales at which point the executor’s responsibility ended. The income tax flowing from income earned after the date of death would be for the heirs in the estate to reflect in their own tax returns.

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 the reasons may be.

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

SARS amended legislation in 2016 which changed the position to the executor now receiving a lot more responsibility out of a tax point of view in that that they would now not only be responsible for the income tax (inclusive of CGT) to date of death, but would 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 have 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.

The general estate administration process, which is already a lengthy and time-consuming exercise, is delayed for an even longer period of time.

This change ensured that SARS was placed in a position where it could keep track of income earned as this had to be declared by the actual executor and simultaneously ensure that SARS was in a position to physically collect the tax due on this income prior to finalisation of the estate.

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.

CAPITAL GAINS TAX

Capital Gains Tax would be applicable in any estate where the deceased held assets to which this tax applies – with the main assets being immovable property, shares 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 (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 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 applicable not 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).

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 on consideration in this instance being that during estate planning 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 tax position changing on a regular basis it is also important to review your Will on a regular basis to ensure tax efficiency.

Author: ANICA UNGERER, Director, Estate and Trusts anica.ungerer@mazars.co.za