Warwick has chosen Appleton to provide Will and estate administration services to its clients. This month, Appleton Managing Director, Lauren Hean, discusses the thorny issue of taxes and deceased estates.
 

Your Will, tax and deceased estates

When an individual dies, there are automatic tax implications that become applicable to that estate. In this article we will briefly discuss the most important of these tax effects with specific reference being made to Income Tax, Capital Gains Tax and Estate Duty.

Income tax

The estate will be responsible only for the normal annual income tax returns and no Provisional Tax returns need to be submitted after an individual has passed away.

Previously, the income tax flowing from income earned after date of death would be for the heirs in the estate to reflect in their own tax returns with the Executor (Appleton) having the responsibility to ensure the heirs are aware of the amounts to be accounted for in their tax returns and the fact that they were obliged to declare that income.

SARS amended legislation in 2016 which changed the position to one where the Executor now receives a lot more responsibility from a tax point of view in that that they would not only be responsible for the income tax (inclusive of CGT as and where applicable) to date of death. In addition to the existing duty they would now also have to register the estate as a separate / new tax payer thereafter and complete and submit tax returns for all taxable income earned within the estate (with an annual R23,800.00 interest exemption being applicable). 

These returns would have to be submitted until the finalisation of the estate. The CGT that the executor would have previously accounted for on post-date of death sales would no longer have to be dealt with separately, but would now form a part of the applicable tax return for the year in which the asset was sold.

Unfortunately, this change in position has caused the general estate administration process, which is already a lengthy and time-consuming exercise, to be delayed for an even longer period of time and whilst the processes have become easier to comply with since the law was amended, it does remain problematic at times.

Capital Gains Tax

Capital Gains Tax (CGT) would be applicable in any estate where the deceased held assets to which this tax applies. The main assets being affected by this are immovable property, shares/unit trusts and business interests. 

Death itself is deemed as a CGT disposal of assets and thus in the deceased’s final tax return this deemed disposal of CGT related assets would have to be reflected.

Note that there are exclusions that can be claimed, for example, for a primary residence there would be an exclusion of R2 million available as well as in the year of death where the normal exclusion available to an individual or natural person (in the amount of R40,000 per annum) is increased to R300,000 for that particular tax year. There are also other exclusions that could potentially be applicable but may not be listed in this article.

Estate Duty

Currently Estate Duty is levied at the rate of 20% on the net asset value in an estate that exceeds R3.5 million, with an estate where the said net asset value exceeds R30 million, being liable for 25% estate duty on the balance exceeding R30 million (applicable from 1 March 2018).

Net estate generally refers to the gross assets in the estate, plus all deemed assets, less liabilities and all other allowable deductions, with the dutiable estate being the net estate less the allowable Section 4A deduction, currently being R3,5 million per individual.

Estate duty becomes due and payable to SARS within one year of the date of death or within 30 days of receipt of the estate duty assessment. If the estate duty is not paid within that period SARS would be entitled to levy interest on the estate duty payable on assessment. The current interest rate per annum that is used for this purpose is 6%. An Executor has the right (and duty) to pay a reasonable deposit to the satisfaction of the SARS Commissioner within one year of death and may then request an interest free extension on the payment of any balance of estate duty.

Conclusion

Although there are other taxes, such as VAT that could potentially be applicable to a deceased estate, income tax, CGT and estate duty are the main and most important ones to consider. The emphasis in this instance being that during the estate planning stage, which is cardinal to the process of having a Will drafted, these taxes should already be considered and estimates calculated if possible at that time, to ensure that the administration of the estate one day runs as smoothly and efficiently as possible. 

Due to the ever-changing tax position, it is also important to review your Will on a regular basis to ensure it remains tax efficient.

With acknowledgment to Mazars, the excellent full article can be found at: https://www.forvismazars.com/za/en/insights/local-thought-leadership/general-thought-leadership/wills-trusts-estates/tax-and-its-effect-on-deceased-estates