Tax and its effects on deceased estates
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.
In this article, I will provide a brief overview of the most important taxes to be considered during your estate planning process.
When a deceased person dies, the Executors step into the shoes of the deceased and they would be 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).
Prior to 1 March 2016 the position was that tax returns would have to be submitted until the deceased’s date of death – meaning 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 of that particular deceased, would be taxable in the hands of the beneficiaries (proportionately 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.
The above lead to an amendment made to the Income Tax Act, which 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 in that, once the pre-date of death taxes have been finalised, the estate would have to be registered as a new taxpayer, with the executor once again having to account for all income earned in the estate from the day after date of death until such time as the Master has formally approved the Liquidation and Distribution Account of the estate, which date is generally accepted to be expiry date of the Section 35 advertisement of the Liquidation and Distribution Account.
For purposes of this article, I will not be discussing the various rebates and other regulations applicable, but it is important to be aware that these differ for the pre and post date of death tax periods.
Capital Gains Tax:
Capital Gains Tax is applicable to a deceased estate in the same manner as it is applicable 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 capital gains tax, such as immovable property, shares, unit trust, etc. 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. It is important to be aware that there are certain rollover /exclusionary rebates applicable with regards to assets subject to capital gains tax that are to be transferred to a resident surviving spouse.
The values (base cost and market value) at which the various disposals are calculated can become quite complex and although we will not be discussing them in this particular article, it is very important to be aware of the values to be utilised for the various capital gains tax calculations and how a variety of things can impact the values to be used. It is also important to be aware of the various exclusions which can be claimed, such as the primary residence exclusion.
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 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, 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 persons 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.
There are many other exclusions that could potentially apply and it is important that all of these are 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 (with many of them not discussed in this article) and it is important that all of these are looked at very carefully by the Testator and his or her advisor prior to the drafting of their Will.
Lastly, any Testator also needs to be aware that there are numerous other taxes that could also potentially effect 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 great effect on a deceased estate one day and should already be considered during the estate planning stage.
Writer: Anica Ungerer
Director – Estates and Trusts
Mazars- Cape Town