Many people have a mental block when it comes to the topic of tax. Who can blame them? Trying to make sense of tax laws in South Africa can be an incredibly difficult undertaking. However, this is not an excuse to leave your assets to fate.
When creating your estate plan, you need to have a basic understanding of inheritance tax and estate duty. In that way, there won’t be any surprises for your loved ones later.
In this guide, we’ll take you through inheritance tax in South Africa and estate duty.
Inheritance Tax In South Africa
When a natural person passes away, that person’s assets are collectively placed into an estate. This deceased estate has to pay certain inheritance taxes as well as personal income tax for the deceased’s final tax year.
The estate assets can include property, movable property (like cars and keepsakes), money, or even business shares.
Several different laws apply to inheritance tax in South Africa:
- The Estate Duty Act (Act 45 of 1955): This law places an estate duty on the deceased estate.
- The Administration of Estates Act (Act 66 of 1965): This Act handles the disposal of deceased estates in the country.
- The Wills Act (Act 7 of 1953): This law influences all testators (those who have written a will or given a legacy) with property in SA.
- The Intestate Succession Act (Act 81 of 1987): This Act covers all deceased people who own property in SA and have not left a valid will.
Inheritance tax is divided into the following types of tax:
- Personal income tax for the deceased
- Estate duty tax
- Capital gains tax
- Donations tax (if relevant to the deceased estate)
We’ll take a look at estate duty tax below.
What Is Estate Duty Tax?
Estate beneficiary/beneficiaries do not have to pay tax on what they inherit. The inheritance is not seen as part of their gross income.
Estate duty is deducted from the estate before it reaches the beneficiaries. Usually, it is the estate executor’s responsibility to pay this tax.
As mentioned, estate duty is regulated according to the Estate Duty Act. This tax applies to the transfer of assets and wealth from the deceased estate to the beneficiaries. It applies to the dutiable amount of the estate.
The tax amount differs depending on the value of the estate.
- For an estate under R30 million, the estate duty is 20% of the estate’s dutiable amount.
- For an estate over R30 million, the estate duty is 25% of the estate’s dutiable amount.
There are some exceptions and limits applicable to this type of tax. For instance, in some circumstances, double taxation may occur. This happens when the deceased’s assets are subject to estate duty within South Africa and a foreign country.
Fortunately, South Africa has estate duty agreements with several countries to avoid double taxation. You can find out more about these tax agreements here.
Estate Duty, Debt, & Life Cover
The winding-up of a deceased estate can take anywhere between five months and several years, even if there is a valid will in place.
This can lead to a trying time for loved ones and family members in a financial and emotional sense. Even more so when estate duty and debt are added to the mix.
When it comes to estate duty and debt, life cover is a useful tool that can help to reduce debt and assist loved ones. The payout from a life insurance policy goes directly to the beneficiaries. It does not form part of the estate, meaning no estate duty tax is applied.
This means your life insurance beneficiaries will receive immediate relief upon your death, instead of having to wait for the estate wealth transfer to be finalised. This gives plenty of value to your loved ones.
In the case of any debt you may have outstanding, life cover is also beneficial. If you nominate a family member as your beneficiary for the policy, the payout is protected from creditors, ensuring your family’s financial security.
Contact us to discuss life insurance and how it can improve your estate planning.
Final Thoughts On Inheritance Tax & Estate Duty
Inheritance tax and estate duty may seem complicated at a glance. Yet, with the right information and help, you can easily navigate through it.
Having life cover policies in place will be instrumental for your estate planning. This type of cover will alleviate the financial stress that the eventual estate transfer process will have on your beneficiaries.
Please do not hesitate to get in touch to find out about estate planning and life cover.
+27 21 933 4170