Understanding the 3 crucial taxes affecting your estate plan in South Africa

Integrating tax planning into your estate strategy is essential to ensure your legacy is preserved and your heirs are protected. Without a clear understanding of how tax applies after death, your estate could face administrative delays, unexpected liabilities, and erosion of value. Here are three critical taxes to consider in your estate plan:

1. Final income tax: Sars has the first claim

When you die, your tax obligations don’t die with you. Sars has the first legal claim on your estate, and your executor becomes responsible for ensuring that all outstanding tax returns are submitted. This includes obtaining tax certificates and IRP5s from financial institutions and settling any unpaid taxes. Since 2016, two income tax assessments have been required:

• A pre-date of death return, covering income earned and deductions up to the date of death.
• A post-date of death return, covering income such as dividends, rental income, and interest earned during the estate administration period, until the Master accepts the liquidation and distribution account (usually after the Section 35 advertisement expires).

It's important to note that inheritances are considered capital in nature and not included in the beneficiary’s gross income. In South Africa, heirs do not pay tax on inherited assets.

1. Capital gains tax: Death is a deemed disposal event

Death is considered a capital gains tax (CGT) event under South African law. On the date of death, you are deemed to have disposed of your assets—such as immovable property, unit trusts, and shares—at market value. This triggers a potential CGT liability in your estate, which must be settled by your executor before the estate can be finalised. Some key CGT considerations:

• A once-off CGT exclusion of R300 000 applies in the year of death.
• The inclusion rate for individuals is 40%, applied to your marginal tax rate.
• Assets bequeathed to a surviving spouse qualify for rollover relief, meaning no CGT is triggered, and the spouse inherits the asset at its base cost.
• CGT is not triggered on the first R2 million of profit on a primary residence.
• CGT does not apply to personal-use assets such as cars, cash, retirement savings, or the proceeds of approved life policies.

The heir who inherits an asset is not liable for CGT until they dispose of the asset themselves.

1. Estate duty: Tax on the transference of wealth

Estate duty is a tax levied on the net value of a deceased person’s dutiable estate:

• 20% is charged on the first R30 million, and
• 25% on any amount exceeding that.

Your dutiable estate includes all local and foreign assets, less allowable deductions such as liabilities, funeral costs, estate administration expenses, and qualifying donations to public benefit organisations. If you were a resident in South Africa at the time of death, even your foreign assets may be included, subject to any applicable double taxation agreements.

Key exemptions and abatements:

• A R3.5 million abatement is available to each individual.
• If unused by the first-dying spouse, the abatement rolls over, allowing the surviving spouse a combined R7 million abatement.
• Assets left to a surviving spouse (including domestic life policy proceeds) are exempt from estate duty.
• Retirement funds and living annuities (where a beneficiary has been nominated) do not form part of the deceased's estate and are excluded from estate duty.

Be cautious with life policies:

• If your estate is the nominated beneficiary, the policy proceeds are included in the estate and attract both estate duty and executor’s fees.
• However, policies correctly structured in terms of a registered ante-nuptial contract, or those forming part of a buy-and-sell agreement, may be excluded from estate duty.

Tax planning is a critical, and often overlooked, element of your estate plan. Understanding how income tax, CGT, and estate duty apply can prevent unnecessary delays, protect your heirs, and preserve your wealth for the next generation. A well-prepared plan balances tax efficiency with compliance—ensuring your legacy is passed on as intended.

* Odendaal is a Certified Financial Planner at Crue Invest.

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