Understanding Death and Taxes
Upon an individual’s death, their estate will automatically be subject to certain tax implications, including Income Tax, Capital Gains Tax and Estate Duty. Let’s take a closer look at how these implications could take effect.
Income Tax Implications
Individuals responsible for Provisional Tax returns before death are no longer obligated to submit them after death. The estate is only liable for the individual’s normal annual income tax return, and no further Provisional Tax returns need to be submitted. The liable income tax may also be subjected to two different sets of tax rules, depending on whether the individual passed away before or after the 1st of March 2016.
Before the 1st of March 2016, the Executor of the deceased’s estate was only responsible for completing and submitting income tax returns up until the date of death. They also had to account for any applicable post-dated taxes related to the sales of assets after death. However, their responsibility as Executor ended once these were paid. After, heirs in the estate become responsible for declaring the income tax from earnings after the date of death.
However, SARS discovered that many heirs did not include their inheritance income in their tax returns, resulting in millions of lost income tax revenue. This resulted in an amendment to Income Tax legislation that gave the estate’s Executor significantly more responsibility. This change outlined that Executors would be tasked to register the estate as a separate taxpayer and complete and submit tax returns on its behalf until the finalisation of the estate. As a result, Capital Gains Tax that would have previously been dealt with separately now forms part of the applicable year’s tax return.
This alteration guaranteed that SARS could audit earnings as required by the law. By doing this, SARS can also physically collect the tax due on this income before the estate can be finalised.
Capital Gains Tax Implications
Capital Gains Tax (CGT) is implemented on any estate where the deceased held assets related to this tax, including but not limited to real property, shares/unit trusts and business interests. CGT is applied to any assets disposed of at death, which is then reflected in the deceased’s final tax return.
An exception to this rule is if the asset subject to CGT is bequeathed to a resident surviving spouse. If this is the case, then the capital gain rolls over to the estate of the surviving spouse and the deemed disposal falls away. The surviving spouse then takes over the asset at its base cost rather than its value on the date of death. It’s essential to keep in mind that this rollover does not apply to non-resident surviving spouses. Additionally, if the estate sells the CGT-related asset bequeathed to the spouse after death, the rollover will no longer be applicable.
If the rollover to a surviving spouse is not applicable, there could be two separate CGT calculations. The first would happen at the date of death, and it would be considered a deemed asset disposal. The second calculation would occur if the estate decided to sell the asset. As we mentioned, the capital gains tax calculation for an asset sale by an estate was done previously separately. Now, that task is included as part of the tax return filed in the year of the sale.
Estate Duty Implications
Currently, estate duty is levied at a rate of 20% on an estate’s net asset value exceeding R3.5 million. For estates where the net asset value exceeds R30 million, 25% of estate duty will be payable on the balance exceeding R30 million.
The net estate is the total of all assets in an estate, plus any other property classified as assets by law, minus all debts and other expenses that can be deducted. The dutiable estate is left after subtracting the value of any property exempt from duties under Section 4A deduction—R3.5 million per individual.
A rollover may apply to assets bequeathed to a surviving spouse, subject to certain limitations or restrictions. This means that if you inherit assets from your spouse and you have not already claimed deductions on those assets, you may be able to deduct the value of the assets. However, the deductible amount will be reduced by any amounts that were awarded to other individuals or trusts.
If the deceased was married to one or more individuals who have since died, the amount that can be deducted from their estate increases from R3.5 million to R7 million. If the deceased is the surviving spouse by more than one marriage, the amount that can be deducted is limited to one predeceased spouse. The Executor gets to choose which spouse this will be.
According to SARS, estate duty becomes payable within one year of death or within 30 days of receipt of the assessment. SARS can charge interest on the outstanding amount if the estate duty is not paid within that period. The interest rate used for this purpose is currently 6% per year.
Although life insurance policies are typically seen as assets when determining estate taxes, it may not be considered if the policy is set up to pay the beneficiaries outside of the estate. This can result in life insurance policies causing significant difficulties if not correctly accounted for, making it crucial for everyone to understand their responsibilities.
Seeking Professional Assistance
At MMS Group, we understand the complexities of income tax implications that follow death. Should you require the assistance of a well-versed tax professional to guide you through these challenging processes, please reach out to our team.
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