Benjamin Franklin once said that “the only thing certain in this world is death and taxes”. Whilst it is extremely difficult to deal with the loss of a loved one, it is important to understand the tax consequences of death.
When a person passes on, all their assets are placed into an estate. These assets include both movable and immovable assets. Deemed property, such as proceeds of life policies, will also form part of your estate when it comes to the calculation of estate duty. Proceeds of policies payable to a spouse are deductible when it comes to the calculation of estate duty payable.
An executor is the person in charge of handling the administration process of an estate. The estate assets will firstly be used to pay off all creditors and administration expenses such as executor’s fees, advertisement fees, bank charges and conveyancing fees payable to attorneys for any property transfers, before the residual assets will be given to the beneficiaries. The unfiled tax returns up to the date of the deceased person’s death must be submitted by the executor, and the executor will not be able to finalise the administration process until SARS has issued a formal Deceased Estate Compliance letter that will authorise the executor to finalise the estate.
Once all the above has been attended to, the executor has to submit various requirements to the Master of the High Court before they will issue what is commonly referred to as a Filing Slip that will authorise the executor to finalise the estate.
Whilst there are various types of tax, these three remain applicable upon death.
Estate Duty Tax
Estate duty is payable at a rate of 20% on the first R30-million and 25% of the value in excess of R30-million. There is however an abatement which means that R3,5-million of the estate’s net value is exempt from estate taxes.
In its capacity as a taxpayer, the estate of the deceased is also liable for paying income tax on all forms of income accumulated between the date of death and the day the estate is finally settled, approved, and closed by the Master of the High Court.
Capital Gains Tax
Death is an event that can trigger capital gains tax because it is viewed as a deemed disposal with the assets being transferred to either the individual’s spouse, children, corporate entities, Public Benefit Organisations, or the estate. Therefore, if upon death the sale or bequest of the deceased’s assets realises a capital gain, the estate will be liable for capital gains tax, unless the surviving spouse is the only beneficiary – then there will be no capital gains tax payable, as the so-called “rollover” principle will be applied. Upon the death of the surviving spouse a capital gains tax event will be triggered, and all assets will then be subject to the possible payment of capital gains tax, where applicable. According to the Income Tax Act, SARS will hold the estate liable for capital gains tax, on the date of the deceased person’s passing.
Addressing these three certainties, or at least sufficiently providing for them, can and will ensure peace of mind for those left behind when someone passes, and will prevent tax implications from passing on to future generations. Contact MJ Chartered Accountants for any tax related advice with regards to an estate.