Estate planning is an essential part of managing your wealth and ensuring that your assets are distributed according to your wishes. One of the most significant considerations in estate planning is estate duty, a tax imposed on the estate of a deceased person before assets are transferred to beneficiaries.
Estate duty in South Africa is governed by the Estate Duty Act 45 of 1955 and is administered by the South African Revenue Service (SARS). Understanding how this tax works can help individuals and families prepare effectively to minimise tax liabilities and ensure that more of their wealth is passed on to their loved ones.
In this blog, we will explore what estate duty is, key considerations, how it is calculated, and strategies for estate planning.
What is Estate Duty?
Estate duty is a tax levied on the dutiable portion of a deceased person’s estate before assets are distributed to heirs or beneficiaries. It is calculated based on the net value of the estate after allowable deductions and exemptions. The purpose of estate duty is to prevent the excessive accumulation of wealth within a few families and to provide revenue for the government.
In South Africa, estate duty is applicable to the estates of individuals who were residents or owned property in the country at the time of their death.
How Estate Duty Works in South Africa
Estate duty applies to the total value of the deceased’s assets, including property, investments, cash, shares, and other valuable possessions. The following are key elements of estate duty:
1. Estate Duty Rates
- The first R30 million of the dutiable estate is taxed at 20%.
- Any amount above R30 million is taxed at 25%.
2. Exemptions and Deductions
Certain exemptions and deductions apply, which can reduce the taxable value of an estate:
- Section 4(q) Deduction: Any assets left to a surviving spouse are exempt from estate duty.
- Charitable Donations: Bequests to approved public benefit organisations are deductible.
- Debt and Liabilities: The estate duty calculation allows deductions for outstanding debts, funeral expenses, and administrative costs.
3. How Assets Are Valued
- Fixed property is valued at its market price.
- Business interests and shares are valued based on financial statements.
- Personal belongings and investments are included at their market value at the time of death.
Key Considerations Regarding Estate Duty
1. The Importance of Estate Planning
Effective estate planning helps reduce estate duty and ensures a smooth transition of wealth. Strategies such as creating a trust, gifting assets before death, and taking advantage of spousal exemptions can help mitigate estate duty liability.
2. The Role of Trusts in Estate Duty
Assets held in a discretionary trust may not form part of an individual’s estate and can reduce estate duty. However, if a trust is deemed to be controlled by the deceased, it may still be subject to taxation.
3. The Impact of Life Insurance on Estate Duty
- Proceeds from all life insurance policies are included in the calculation of estate duty of the deceased estate. If the policy complies with the requirements of the Estate Duty Act, the proceeds payable to the beneficiary owner (Buy and Sell Agreement of shares in a business) will be exempt from estate duty. The proceeds will be excluded from the estate for the calculation of the Executor’s fees.
- The proper structuring of life insurance policies can help offset estate duty liabilities.
4. Capital Gains Tax (CGT) vs. Estate Duty
Capital Gains Tax is separate from estate duty and applies when assets are deemed to be disposed of upon death. While estate duty applies to the total estate value, CGT is levied on the capital gain made on assets. Both taxes need to be considered in estate planning.
5. Payment of Estate Duty
Estate duty must be paid to SARS before an estate is wound up. The executor of the estate is responsible for ensuring that the tax is calculated correctly and settled within 12 months from the date of death.
How to Calculate Estate Duty
Step 1: Determine the Gross Value of the Estate
This includes all assets, such as property, cash, shares, investments, business interests, and deemed assets.
Step 2: Deduct Allowable Expenses
Subtract funeral expenses, liabilities, estate administration costs, and charitable bequests.
Step 3: Apply the Section 4(q) Deduction
Any portion of the estate left to the surviving spouse is deducted from the taxable amount.
Step 4: Apply any other Section 4 Deductions
Any other deductions, such as funeral, foreign property, reverting limited interests, deemed property, etc.
Step 5: Determine the Dutiable Estate
Dutiable estate = Gross estate value – Allowable deductions
Step 6: Apply Estate Duty Rates
- 20% on the first R30 million of the dutiable estate.
- 25% on the amount exceeding R30 million.
Conclusion
Estate duty is an essential consideration in estate planning, impacting how wealth is transferred to future generations. By understanding how estate duty is calculated and applying strategies to reduce liabilities, individuals can ensure that their loved ones receive the maximum benefit from their estate.
At Crest Trust, we specialise in estate planning and trust management to help minimise estate duty while ensuring compliance with South African tax laws. Contact us today to secure your financial legacy. Visit Crest Trust for expert guidance on estate duty and estate planning.
FAQs
1. What is the estate duty in South Africa?
Estate duty is a tax on the net value of a deceased person’s estate. It is 20% for estates up to R30 million and 25% for amounts exceeding R30 million.
2. What is the meaning of estate duty in simple words?
Estate duty is a tax paid on the assets of a deceased person before they are passed on to beneficiaries.
3. What is the formula for calculating estate duty?
Estate duty = (Gross Estate – Deductions – Exemptions) × Applicable Tax Rate
4. What is excluded from estate duty?
- Assets bequeathed to a surviving spouse.
- Bequests to charitable organisations.
- Certain retirement fund benefits.
- Life insurance policies with nominated beneficiaries.