Paying taxes in death
ESTATE: FINANCIAL COMMITMENTS TO SARS FOLLOW YOU TO THE GRAVE
Tax planning a cornerstone for effective transfer of wealth.
Understanding the interplay between tax and your estate plan is important to ensure your estate does not encounter difficulties in the administration process.
The strategic integration of tax planning in the context of estate planning is a cornerstone for the effective transference of wealth.
We take a closer look at tax in the context of your estate plan.
Income tax
Your tax commitments follow you to the grave and the South African Revenue Service (Sars) has first claim to what it is owed.
Your executor, who will effectively step into your shoes in the event of your death, is responsible for submitting your tax returns to Sars, and making sure they are up to date – including any tax years that are outstanding.
In such circumstances, your executor will have to request tax certificates and IRP5s from applicable institutions and submit them to Sars.
Following legislative changes in 2016, there are now effectively two tax assessments your executor will need to carry out – “predate of death” and “post-date of death”.
Where an heir or beneficiary inherits an asset, this is regarded as a capital receipt and is not included in the taxpayer’s gross income. There is no tax payable by a person who receives an inheritance.
Capital gains tax
South African residents, living or deceased, are required to pay capital gains tax (CGT) on the profit made when disposing of an asset.
In terms of the Income Tax Act, death is a CGT event, and a deceased person is deemed to have disposed of their assets for an amount equal to the market value of the assets on the date of their death, including assets such as immovable property, shares and unit trusts.
When a person dies, the laws of succession come into effect, which gives rise to a change in ownership of the deceased’s assets, and this, in turn, has CGT implications.
It is the executor’s job to declare the disposal of the assets in the deceased’s final tax return. Any CGT payable by the estate will be reflected as a liability and deductible for estate duty purposes, and the executor will have to pay any CGT liabilities to Sars before finalising the estate.
The heir is only liable for CGT when they dispose of the asset.
Estate duty
Estate duty is tax paid on the dutiable estate and is charged at a rate of 20% on the first R30 million and 25% on anything over that.
The dutiable estate includes all the deceased’s assets and liabilities, less any allowable deductions. Estate duty is applicable to the estates of all deceased individuals who reside in South Africa at the date of their death, regardless of citizenship.
Further, it is also applicable to foreign property owned by the deceased if they were a SA resident at the time of their death.
Funds held in any retirement annuity, pension fund, provident fund or living annuity do not form part of the estate and are not included when calculating estate duty, making these vehicles attractive estate planning tools.
While life insurance policies are often used to provide liquidity in an estate, where the estate is the nominated beneficiary, the proceeds of the policy will be included when calculating estate duty and executor’s fees.
Collier is certified financial planner at Crue Invest