This article deals with the financial outcome related to the estate of a deceased person. The topic will be covered in more than one article as the detail is extensive and too lengthy to read in one sitting.
When a natural person (taxpayer) dies, that person is called a ‘deceased person’ and all his or her assets on date of death will be placed in an estate. This estate is called an estate of a deceased person (commonly known as a ‘deceased estate’). Assets in a deceased estate can amongst other things include immovable property (house), movable property (car, furniture, etc.), cash in the bank, etc. The person who administers a deceased estate is called an ‘Executor’. Once the Executor has finalised all the administration in the deceased estate, the remaining assets (after paying all the debts) will be distributed to the beneficiaries.
A beneficiary can consist of either heirs and/or legatees. A legatee is a person who receives a specific asset from the deceased estate. An heir is a person who receives the balance of the estate (that is, after all disposals to a legatee are finalised).
What is estate duty?
Estate duty is the duty levied under the Estate Duty Act, 1955 (the ED Act) on the dutiable amount of an estate of a deceased person.
What is the estate duty rate?
The duty is levied on the dutiable amount of an estate that does not exceed R30 million at a rate of 20%. Estate duty is levied at a rate of 25% on the dutiable amount of an estate that exceeds R30 million.
What is included in an estate?
The estate of any person shall consist of all the property and deemed property (situated in and outside South Africa) of the deceased person as at the date of death. However, for a
deceased person who was not ordinarily resident in South Africa, any property situated outside South Africa will be excluded.
What is the meaning of “property”?
“Property” is defined in section 3(2) of the ED Act to mean any right in or to property, movable or immovable, corporeal or incorporeal. The definition is comprehensive and includes real rights such as the rights attached to fixed or moveable property as well as personal rights (for example, any fiduciary, usufructuary or like interest in property and any right to an annuity (other than a right to an annuity charged on property)). Crypto assets are regarded as movable, incorporeal property in the estate of the deceased person and are included for estate duty purposes.
Section 3(3) of the ED Act further includes certain property as deemed property in the estate. The following property is regarded as deemed property:
• Domestic policies on the life of the deceased, subject to exclusions.
• Exempt donations under section 56(1)(c) or (d) of the Income Tax Act.
• An accrual claim on behalf of the deceased person against the surviving spouse under the Matrimonial Property Act, 984.
• Any property that the deceased was before his or her death competent to dispose of for his or her own benefit or for the benefit of his or her estate.
Section 3(3)(e) of the ED Act specifically includes any contributions made by the deceased person to an approved South African retirement fund that was allowed as a deduction under section 5 of the Second Schedule to the Income Tax Act, in determining the lump sum benefit payable to the deceased person.
What property is excluded from an estate?
A distinction should be made between a person who is ordinarily resident at the time of death and a person who is not.
Ordinarily resident: Section 4(e) of the ED Act provides that property acquired before becoming ordinarily resident in South Africa may under certain circumstances be excluded from the estate. If the deceased is ordinarily resident in South Africa at the date of death, his/her property in South Africa as well as his/her property situated outside South Africa, subject to certain exclusions, is taxable.
Not ordinarily resident: Property situated outside South Africa as provided for in section 3(2)(c) – (h) of the ED Act is excluded from the deceased estate in South Africa. If the deceased person was ordinarily resident outside South Africa at the time of death, but had assets in South Africa, the deceased person will have a South African estate for estate duty purposes.
Section 3(2)(i) of the ED Act excludes any benefit payable to the deceased from an approved retirement fund as a result of death.
Are there any exemptions from estate duty?
No. The ED Act does not provide for any exemptions, but only for the exclusion of certain property from an estate.
What impact can the matrimonial property regime have on the estate duty calculation of the deceased?
The matrimonial property regime under which the deceased person was married will impact the calculation of estate duty. In a marriage out of community of property, each spouse has his or
her own estate. Where the accrual system applies to a marriage out of community of property, the spouse with the smallest accrual will have a claim against the other spouse. If the deceased person has the larger estate, a claim will be made against the deceased estate by the surviving spouse [section 4(lA)]. If the deceased person has the smaller estate, the estate have an accrual claim against the surviving spouse and it will be included in the deceased estate as an asset [section 3(3)(cA)].
In a marriage in community of property, a joint estate exists. When one spouse dies, the entire estate must be administered, but the surviving spouse has a 50% interest in the joint estate and may claim his or her half share. Additional claims may arise under the law of intestate succession. The value of the surviving spouse’s estate is calculated after liabilities and administration costs have been deducted from the joint estate. The funeral costs and estate duty are paid from the deceased’s half of the estate. The latter two deductions are made only after the joint estate has been divided.
Although the whole amount of funeral costs is taken into consideration for administration of the joint estate, that amount is added back to establish the one-half share of the joint estate belonging to the surviving spouse and which is not subject to estate duty. The whole amount of funeral costs is then subtracted from the deceased’s one-half share of the joint estate.
What deductions are available to reduce the value of an estate?
The following list of expenses are available to qualify as deductions against the gross value of the estate to determine the net value:
• Section 4(a): Funeral, tombstone and deathbed expenses.
• Section 4(b): Debts owed in South Africa.
• Section 4(c): Costs of administration and liquidation. Costs incurred in relation to the management and control of income accruing after the date of death is excluded from this deduction.
• Section 4(d): Costs incurred to adhere to the requirements of the Master of the High Court (Master) or the Commissioner for the South African Revenue Service (Commissioner or SARS), for example, cost of valuing property included in the estate, legal costs in relation to disputes with SARS, security costs and fees to professional persons.
• Section 4(e): Deductions in respect of foreign assets and rights.
• Section 4(f): Deductions in relation to foreign debts.
• Section 4(g): Limited interests received as a gift.
• Section 4(h): Bequests to certain institutions.
• Section 4(i): Improvements made by beneficiaries to property.
• Section 4(j): Improvements to properties subject to a limited interest.
• Section 4(lA): Accrual claims under the Matrimonial Property Act.
• Section 4(m): Limited interests created by the predeceased spouse and enjoyed by the deceased.
• Section 4(o): Value of books, pictures, statuary other objects of art.
• Section 4(p): Deemed property and the valuation of company shares.
• Section 4(q): Bequest to the surviving spouse.
Part two of this topic will deal with the valuation of the Estate Duty.