Capital Gains Tax was implemented on 1 October 2001 but is still relatively new to many people, especially when it comes to estates and Estate duty.
When a person dies, two tax entities come into existence for the purposes of Capital Gains Tax: the deceased and his/her estate.
Capital Gains Tax is levied on the value increase of an asset in the hands of the deceased, in other words the fair market value of the asset on the date of death, minus the cost at which the deceased had acquired the asset. When a person dies, it is regarded as alienation of all his/her assets on date of death, and the calculations are done as if the assets were sold by implication on the day preceding death. All debarments to which the deceased would have been entitled during his lifetime are still available to the estate.
As in the case of Estate duty a bequest to the surviving spouse shall not be taken into account for the calculation of capital gain, as it is regarded as a so-called roll-over. The capital gain will then only be calculated in the estate of the surviving spouse. It is important, however, to take cognisance of the fact that the initial value at which the property was acquired shall, in such a case, be valid as base cost in the surviving spouse’s estate and not the value at which the roll-over took place in the deceased spouse’s estate.
In the case of primary property the estate will also qualify for the R2 million rebate applicable to primary property. The definition of a primary residence is a residence in which a natural person or a special trust holds an interest and in which the natural person or a beneficiary of the special trust or the spouse of the person or beneficiary is or was normally residing as his/her first residence and which he/she used mainly for domestic purposes.
Interest means among others the right of use or right of occupation. Consequently the right of existence in a retirement village does mean among others the right of occupation, therefore it will be subject to Capital Gains Tax yet qualify for the rebate applicable to primary property.
The estate also qualifies for an annual rebate of R300 000 in the year of death.
Deceased estates are subject to Capital Gains Tax. Upon death the property is valued against market value which is deemed to be the selling value of the property. With the implementation of Capital Gains Tax the Minister of Finance reduced the Estate duty rate from 25% to 20%, most probably to provide for the additional liability of Capital Gains Tax. Furthermore the rebate on Capital Gains Tax in the year of death amounts to R300 000 and not the usual R30 000 which is applicable to individuals.
The interaction between the CGT and Estate duty can be explained with the following examples:
Uncle Koos is a widower who dies without debt, but he owns a residence worth R1.8 million, a vehicle to the value of R160 000, furniture and household appliances which are worth R200 000 and a beach house to the value of R1.5 million, which he bought for R700 000. His Income tax rate in the year of death is 30%. The primary residence, the vehicle and the furniture and household appliances are exempt from Capital Gains Tax. The beach house, however, is subject to CGT which is calculated as follows:
Value at date of death: R1.5 million
Minus base cost: R700 000
= R800 000
Minus Capital Gains Tax rebate in year of death: R300 000
= Capital gain R500 000
Taxable portion (33,3%): R166 500
The amount of R166 500 is added to Uncle Koos’ normal taxable income and taxed at 30% (his Income tax rate). The tax on that is ±R50 000.
His estate’s Estate duty is calculated as follows:
Residenc: R1.8 million
Vehicle: R160 000
Furniture and household appliances: R200 000
Beach house: R1.5 million
Total assets: R3 660 000
Minus liabilities (Income tax): R50 000
Net value of estate: R3 610 000
Minus estate rebate: R3 500 000
= Taxable portion of estate: R110 000
His estate’s Estate duty at 20% on the taxable portion of the estate is R22 000. His estate thus pays a total of R72 000 to the Receiver of Revenue. It is clear that it is not tax upon tax (compound tax) as many people argue, but in fact two different types of tax.
It is therefore extremely important to plan your estate thoroughly to ensure that it doesn’t find itself in a dangerous position as far as owed Capital Gains Tax and Estate duty are concerned.
This article is a general information sheet and should not be used or relied on as 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 financial adviser for specific and detailed advice.
