Many people come to pay their last respects when you die. SARS is among the crowd…
Some years ago when I was still a member of the Welsh Male Voice Choir of South Africa, at one rehearsal, whilst battling with a particularly difficult piece of music containing unusual phrasing, our exasperated music director exclaimed: “Gentlemen, there is no breath after ‘death’!”
Whilst this profound proclamation had the choristers rolling on the floor with laughter as our MD struggled to grasp the unintended pun, it got me thinking about how one plans for the inevitability of death. In many cases, one’s death results in a mad scramble as family members and creditors clamour for their slice of the pie.
And of course, the South African Revenue Service is right in the thick of things, claiming its share, and many people will be shocked as to how many areas SARS can claim from when it comes to their estates.
Benjamin Franklin famously spoke of death and taxes being two of life’s certainties. The difference is that death only comes around once…
Most people are familiar with the fact that the tax year normally ends on the last day of February (in the case of individuals). However, when you die, your final year of assessment ends on that date. This means that in addition to the other tasks involved in winding up your estate, your executor also has to file an income tax return for the period covering 1 March to the date of death.
The process is the same as for a normal tax return, except for the period in which the earnings and deductions are calculated. If the submission of this return results in a shortfall of income tax, SARS will have a claim against your estate for the amount payable.
In addition, the estate itself must also be registered as a taxpayer, since in many cases it will continue to earn income whilst the winding-up process is taking place, which can be anything from 6 to 18 months or even longer, depending on the complexity thereof.
For example, if you owned rental property which you have left to your children, the rentals that are generated by such property forms part of your estate from the time of your death up to the time the property is transferred to your children. This income will be taxed in the estate, requiring a further tax return to be completed. Once again, any shortfall will be claimed by SARS from your estate.
South Africa, like most countries, levies estate duty on the assets of a deceased estate. This duty is paid at a rate of 20% of the ‘dutiable amount’ of the estate, which is calculated as being the gross asset value of the estate, less any bequests to a surviving spouse, charitable organisations, reasonable funeral costs, and the so-called ‘Section 4A’ abatement, which refers to the first R3.5 million of gross assets that are exempt from estate duty.
Although the average person may think that R3.5 million is a vast amount, and therefore should not concern themselves with estate duty, bear in mind that with the average house price now costing around R1 million, and adding to that your car, furniture, personal effects, and a couple of life insurance policies, it’s not too hard for the ‘average’ estate to exceed R3.5 million nowadays.
CAPITAL GAINS TAX
However, the long arm of SARS’ reach does not stop there. With the introduction of Capital Gains Tax (CGT) with effect from 1 October 2001, further taxation is levied on the taxable capital gain of any assets that are disposed of.
In the case of death, you are deemed to have disposed of your entire estate, and a potential liability for CGT is thus triggered. The “proceeds” realised by such deemed disposal is the market value of the assets at the time of your death.
There are, of course, certain exemptions (2018/19 tax rates) – the first amount of R40 000 which is ordinarily exempt from CGT in any one year is increased to R300 000 in the year of your death, whilst the first R2 million of the gain on your primary residence, as well as any gain on certain “personal use assets”, remains exempt.
In addition, if your primary residence is bequeathed to your surviving spouse, and the gain in value exceeds R2 million, the CGT liability can be “rolled over” until the property is eventually disposed of by your surviving spouse. In this way, the CGT liability is deferred. However, bear in mind that if this rollover provision is exercised, the CGT liability will be based on the gain from the time you bought the property, not from the time of your death.
PLANNING FOR ESTATE TAXES
There are many ways that one can plan to reduce estate duty, involving the use of trusts and other estate planning techniques. Discussion of such planning techniques is beyond the scope of this article. However, if you have a sizeable estate exceeding, say, R5 million, it may be worthwhile obtaining professional advice in this regard.
If, on the other hand, you are an ‘average Joe’ who is nevertheless concerned that your estate will be liable for some estate duty, and will not have sufficient cash available to meet this and other tax liabilities, the simplest method of providing the necessary liquidity is the good old-fashioned life assurance policy.
We are not talking about the fancy ‘universal’ policies that the life assurance industry has cooked up over the years, that are the subject of much debate at the moment – particularly when it comes to costs, poor investment returns, and derisory surrender values. Here, we are talking about life insurance in its purest form – a lump-sum amount to be paid out to your beneficiaries when you die. This cover should be fairly inexpensive, although the actual cost thereof will be determined by your current age, your general state of health, and whether or not you are a smoker.
The amount of cover that you require will be determined by your particular circumstances, but if you want it purely to cover estate and other taxes at the time of your death, a good starting point would be 150% of your estimated tax liability. This will take into account the fact that the proceeds of the policy itself will be subject to estate duty, and will also build in some contingency should your tax liability be more than you originally anticipated.
It is probably a good idea to build in annual increases to the amount of cover, so as to take into account the increase in the value of your estate over time, since such increase in value will also increase the amount of estate duty payable on your death.
Any balance will remain in your estate, to be distributed to your beneficiaries once the estate is wound up.