In South Africa, the concept of deemed capital gains tax (CGT) at the time of death is a crucial aspect of estate planning and tax compliance. When an individual passes away, their assets are considered to have been disposed of at market value on the date of death, triggering a potential capital gains tax liability.

What is Deemed Capital Gains Tax?

Capital gains tax is a tax on the profit realized from the sale of a non-inventory asset. In the context of deemed CGT at the time of death, it means that the deceased's assets are treated as if they were sold at their market value on the date of death, even though no actual sale has occurred. This theoretical disposal is known as a "deemed disposal."

How is CGT Calculated?

The calculation of CGT involves determining the capital gain or loss, which is the difference between the market value of the assets at the date of death and their base cost (the original purchase price plus any allowable costs). If the market value exceeds the base cost, a capital gain arises; if it is lower, a capital loss occurs.

Examples of allowable costs are;

• Original Purchase Price: The initial cost of acquiring the asset.

• Improvement Costs: Expenditures on enhancing or upgrading the asset.

• Transfer Costs: Fees and charges related to transferring ownership.

• Legal Fees: Costs associated with legal services in acquiring or disposing of the asset.

The capital gain is then included in the deceased's final income tax return, and the relevant CGT is applied. For individuals, only 40% of the capital gain is included in taxable income, and it is taxed at the individual's marginal tax rate.

Exemptions and Reliefs

There are certain exemptions and reliefs available that can reduce the CGT liability at the time of death:

1. Primary Residence Exemption: If the deceased owned a primary residence, a portion of the gain may be exempt from CGT. Currently, the first R2 million of the gain on a primary residence is exempt.
2. Annual Exclusion: Each individual is entitled to an annual exclusion on capital gains, which currently stands at R40,000. In the year of death, this exclusion is increased to R300,000.
3. Rollover Relief: Transfers to a surviving spouse are typically exempt from CGT under the rollover relief provisions, meaning the spouse will inherit the asset at its original base cost.

Practical Considerations

Proper estate planning is essential to manage potential CGT liabilities effectively. This can involve:

• Valuation of Assets: Ensuring accurate and up-to-date valuations of assets to determine the correct market value at the date of death.

• Record Keeping: Maintaining thorough records of the base cost and any improvements or costs related to the assets.

• Consultation with Tax Professionals: Seeking advice from tax professionals to navigate the complexities of CGT and explore strategies for mitigating tax liability.

Conclusion

Deemed capital gains tax at the time of death can have significant implications for the estate of the deceased and the beneficiaries. Understanding the rules and available reliefs is crucial for effective estate planning and tax management. By proactively addressing these issues, individuals can ensure a smoother transition of their assets and minimize the tax burden on their heirs.

Article by Lou van Niekerk; who is one of the founding directors of Triplebar Business Direction and has been a business consultant for the last 15 years. He holds an MBA, is a registered tax practitioner and has helped numerous businesses achieve a sustainable growth path while increasing value.