The taxes applicable to a deceased estate

29 May 2024 64
When a person passes, their estate must be reported to SARS and so becomes a new taxpayer with various taxes applicable. If the deceased had foreign assets, international taxes may also apply. The executor of the deceased estate is responsible for handling all tax matters related to the deceased estate, which can become quite complex, depending on the nature of the estate. In this article, we look at some of the most important taxes applicable to a deceased estate.

Importantly, not all taxes are always applicable to every estate, with the circumstances of a deceased estate determining the applicable taxes. The executor also has has to register an estate with SARS even if the deceased was a pensioner or not registered for tax. 

Income Tax
Two types of assessments should be carried out to determine the income tax payable by an estate, namely a pre-death and post-death assessment. A pre-death assessment is carried out on all the income and deductions which applied to the deceased before his/her death. Post-death assessments are made up of all income and deductions in the estate after the deceased’s death. Post-death taxes are payable on all income received by the deceased estate in the form of rental, farming, interest, dividends etc. 

To be noted. If the deceased was married in community of property and income is earned by the deceased estate, 50% of the income must be declared by the deceased estate and the other 50% by the surviving spouse. 

Crypto assets are also regarded as taxable assets in a deceased estate where the crypto assets are seen as trading stock. 

Capital Gains Tax
Once a person passes away, it is deemed that they have disposed of their assets to a new owner. This deemed change of ownership brings into play Capital Gains Tax (CGT) which is payable by the estate. 

CGT is imposed on all assets of the deceased which are subject to CGT, notably immovable property, shares, and business interests. The current position is that on death, the first R300 000 of capital gain is excluded from tax with 40% of the balance of the gain being included in the taxable income of the deceased in the year of their death. 

The only exceptions to CGT are, if the asset which is subject to CGT, is bequeathed to a resident surviving spouse. Take note that crypto assets which are regarded as capital are also subject to CGT. 

The applicable CGT liability of the deceased estate is payable to SARS before any distributions can be made to heirs. 
Estate Duty
Upon the death of the deceased, Estate Duty is payable by the deceased estate. Each estate is granted a R3.5 million rebate with 20% Estate Duty charged on any amount over the rebate, up to a limit of R30 million. A further 25% Estate Duty will be charged on any amount over R30 million. No Estate Duty is charged on the inheritance received by the surviving spouse, as such liability is postponed until the death of the surviving spouse. Where the assets in an estate are subject to estate duty in a foreign country, double taxation may arise, which we deal with in more detail below.

Donations Tax
Donations Tax is only applicable when assets from an estate are donated to another party. Any such donation is subject to Donations Tax levied at 20% on the value of the donation. The estate is primarily liable for the Donations Tax, but, should the estate not make the necessary Donations Tax payment, the person who received the donation becomes jointly and severally liable for the Donations Tax with the deceased estate.

International Taxes
South Africa has a residence-based system of taxation. This means South African residents are subject to Income Tax and Estate Duty on their worldwide assets. Estate Duty is currently levied on the worldwide dutiable estate of the deceased, with certain exceptions (such as bequests to surviving spouses). In addition to Estate Duty, a deceased estate with foreign assets may also be liable to pay Situs Tax (death taxes) depending on the location of the foreign assets, resulting in potential double taxation if the foreign country lacks a double taxation agreement with South Africa. 

In both the UK and the US, for example, you will be liable for Situs Tax, which refers to taxing assets based on their location or situs. In simpler terms, the jurisdiction where the property is situated or deemed to be situated dictates its taxation. To alleviate tax burdens for taxpayers holding assets abroad, South Africa has established double taxation agreements with numerous countries worldwide. These agreements aim to mitigate tax liabilities by determining which country has the taxation rights over specific assets. However, the specifics of these agreements vary, and taxpayers should review the terms relevant to the foreign country where their investments or assets lie as part of their overall estate planning.

The range of taxes applicable to any estate, makes it imperative that proper estate planning be conducted in life to prepare and plan for these taxes and so avoid any unforeseen tax consequences following your death. The administration of a deceased estate, particularly with foreign assets, requires the appointment of a specialist executor that understands the taxes and calculations applicable and can help execute the estate plan of a deceased effectively with the correct payment of applicable taxes.

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