IS TAX IMPOSED ON SUMS OF MONEY WHICH HAVE BEEN INHERITED?

Any asset which is attained by an heir to a deceased estate is termed as a ‘capital receipt’ and is not included in the heir’s gross income. Thus, tax is not payable by an heir who receives an inheritance from a deceased estate. Further, an heir to a deceased estate is not liable for payment of Capital Gains Tax (CGT). Any CGT which would be due by the estate is payable before the inheritance is transferred to the beneficiaries. As mentioned above, an asset does not give rise to a capital gain at the time of its inheritance – any capital gain or loss is only worked out once the asset is ultimately sold or disposed of in any other manner.

WHAT IS ESTATE DUTY?

During a person’s lifetime, all one’s income is taxable, that is, up until one’s date of death. After a person’s death, a new taxable entity is formed, which is called an “estate”. Every death must be reported to SARS, even if the estate is not liable for the payment of ‘Estate Duty’.

The estate of a deceased individual is subject to an amount of 20% Estate Duty. This percentage is only imposed once a deduction of R3.5 million against the net value of the estate has been taken into account. To illustrate this, see the worked example below:

Net value of estate:                                                                         R4 million
Estate duty only dutiable on the amount exceeding: R3.5 million
Amount exceeding R3.5 million:                                             R500 000.00
20% of R500 000.00:                                                                     R100 000.00

Thus, the executor of the estate will be responsible for paying the amount of R100 000.00 to South African Revenue Service (SARS) in Estate Duty.

Estate Duty is due to SARS within one year of date of death, or 30 days from date of assessment if assessment is issued within one year of date of death. Currently, interest is charged at 6% p.a. on late payments.

Compiled by: Laura Ames

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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What is a usufruct?

“A usufruct provides to the usufructuary a right of use of property or assets, lifelong or for a specific period, but the usufructuary does not acquire ownership of the relevant property or assets.”

Usufruct is often applied as part of estate planning in order to save on Estate duty, as the calculated value of the usufruct qualifies as deduction for Estate duty, should the usufructuary be the surviving spouse. E.g. a woman may bequeath her property to her son provided that her spouse has lifelong usufruct from it.

Obviously this kind of bequest may create problems, as the son is not able to utilise the property for personal use or rent it out as long as his father is still alive. If we talk about agricultural property the problems escalate and the practical administration of the usufruct can result in many a headache.

These issues are, however, of a personal nature and our opinion is that the root of the problem is actually the accountability of Capital Gains Tax which will revert to the owner when the property is eventually sold.

The value of the usufruct when it is created is recovered from the market value of the property in order to determine the bare property value. This calculated value will then represent the base cost of the property when it is eventually sold.

Example:

I, TOUGH TINA, bequeath my immovable property to my son, LITTLE JOHN, subject to the lifelong usufruct of my spouse, BIG JOHN. BIG JOHN is thus the usufructuary and LITTLE JOHN the bare owner.

Suppose the value of the property for the purpose of this example is R1 million. The usufruct value is calculated by capitalising R1 million allowing for BIG JOHN’s life expectancy (according to tables) and multiplying it by 12% (or a % as approved by SARS), in other words R1 million x [ table determined factor amount ] x 12%.  Assume this translates to R800,000.

The bare property value at the death of TOUGH TINA is thus R1 million minus R800,000 = R200,000. Should LITTLE JOHN sell the property at R1.5 million before BIG JOHN’s death, taxable Capital Gains will potentially amount to R1.3 million on which tax is payable.

We are not in principle against usufruct, but it is clear that costs and the influence of Capital Gains Tax on usufruct should be studied thoroughly before considering such a stipulation in your will.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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