Understanding estate duty

by Marius Du Toit | 28,Feb,2024 | Efficient Benefit Consulting, Personal Financial Planning, Q1 2024

Q & A with Marius du Toit, Managing Director, Efficient Benefit Consulting and Johan van Vuuren, estate planning expert, Efficient Board of Executors

Many people and families find it difficult to navigate the complex obligations that arise under the legislation governing the administration of estates. With the recent announcement of revisions to the estate duty legislation in South Africa, it is now more critical than ever to understand the consequences of these changes and how they may affect estate planning.

Marius du Toit, Managing Director of Efficient Benefit Consulting, sat down with Johan van Vuuren, an estate planning expert from Efficient Board of Executors (EFBOE), to understand estate duty, the laws around it and how it affects estate planning for members of retirement funds.

Marius du Toit (MdT): What is estate duty? 

Johan van Vuuren (JvV): Estate duty is the duty levied under the Estate Duty Act, 1955, on the ‘dutiable amount’ (this is explained later) of an estate of a deceased person. It is a form of taxation imposed on the assets and properties left behind by a deceased individual upon their passing.

Estate duty is levied on the worldwide property and deemed property of the deceased who was a South African resident at the date of their passing. In the case that the deceased was not a South African resident, estate duty will be levied on his South African property only. 

MdT: How is estate duty calculated and do the proceeds of a death benefit from a retirement fund on unapproved group life scheme form part of the calculation? 

JvV: The first step in calculating estate duty is to determine the gross value of the estate. This is done by identifying the estate property (assets) and deemed property (any benefit received because of the death of the deceased). Determining whether any property that the deceased may have owned fits the Act’s definition of property may be a difficult process for many executors, thus the definition of property should be carefully considered. 

Given that retirement fund death benefits and group scheme benefits are paid directly to the member’s beneficiaries and/or nominees, these assets fall outside of the deceased estate and are not subject to estate duty. Any payment from these funds is however subject to tax and will form part of the deceased’s final tax return. 

Property, as defined in the Estate Duty Act, includes any right in or to movable or immovable property, both corporeal and incorporeal. The term corporeal refers to tangible assets, which are physical and can be seen or touched. These include cash, inventory, plant, machinery, and buildings. On the other hand, incorporeal refers to intangible assets like patents, trademarks, intellectual property, and goodwill. 

One key aspect of estate duty is the exemption threshold, which determines the value of an estate below which no tax is levied. Estates falling below this threshold typically do not incur any estate duty liability, whereas those exceeding it may be subject to taxation on the portion that exceeds the threshold. The current value of the section 4A abatement (the tax exemption threshold) is R3,5 million. 

It should be noted that there are no exemptions from estate duty, just exclusions of specific property (assets) from an estate. 

Funeral expenses, debts owing in South Africa, administration and liquidation charges, and bequests to specific organisations are among the deductions available that reduce the gross value of the estate. 

MdT: What is ‘matrimonial property regime’ and how does the deceased’s regime affect their estate duty? 

JvV: Matrimonial property regime refers to the system of property ownership between spouses. It provides for the creation (or absence of) a marital estate, what properties are included in that estate, how and by whom it is managed and how the estate will be divided and inherited at the end of the marriage. 

A marriage in community of property and a marriage out of community of property have different rules for the handling of an estate. Also, if you and your partner are not married, you might not fall within the definition of ‘spouse’, which could impact on your planned inheritance. 

It is crucial that you understand the impact of your marital property regime. Planning your estate in a way that does not agree with your marital property regime, can result in financial problems upon death, such as the forced sale of assets, inability to pay taxes and debt, and the estate not being able to provide sufficiently for the surviving spouse. 

MdT: Is estate duty payable if an estate is passed from a deceased spouse to a surviving spouse? 

JvV: In terms of the Estate Duty Act, the first-dying spouse can leave assets to the surviving spouse of up to R3.5 million without incurring Estate Duty. On the death of the surviving spouse, they can make use of any unused portion of the first-dying spouse’s estate duty exemption to offset any estate duty that the surviving spouse’s estate may attract. 

Section 4(q) of the Estate Duty Act allows for a deduction of any asset left to the surviving spouse. Should this be the case, the first-dying spouse will then roll over their abatement to their surviving spouse. The surviving spouse will then have a R7 million estate duty abatement in the event of their death. 

MdT: At what rate is estate duty charged? 

JvV: Estate duty is charged at a rate of 20% on the dutiable amount of an estate that is less than R30 million, and a rate of 25% on the dutiable amount of an estate that is greater than R30 million. 

Estate duty is calculated by determining the gross value of the estate, subtracting allowable deductions and expenses, and then applying the appropriate rate of duty (20%/25%) depending on the dutiable amount of the estate. 

Let’s use a practical example to illustrate how the dutiable amount is calculated and the consequent estate duty amount:

MdT: Who pays the estate duty?

JvV: The executor of the deceased’s estate is responsible for paying the estate duty. The executor must pay the duty within one year of the date of death or within a further extended period approved by the Commissioner for the South African Revenue Service (SARS).

 

Marius Du Toit
 Managing Director at Efficient Benefit Consulting | + posts