Estate duty: what you need to know

Former Finance Minister Malusi Gigaba announced in his February Budget Speech that from 1 March this year, estate duty would be increased from 20% to 25% on the ‘dutiable value’ of estates over R30 million. For all other estates in excess of R3.5 million up to R30 million, it remains at 20%. But what exactly is this ‘dutiable value’, and what’s included when the amount you need to pay is determined? Here’s what you need to know.

Estate duty in South Africa is charged on the ‘dutiable estate’ of a deceased individual – in other words, all property after allowable deductions, which include debts, funeral and death-bed expenses, administration costs, property accruing to a surviving spouse, and the first R3.5 million of the value of the property. It’s levied on the property of deceased persons ordinarily resident in South Africa, as well as on the South African property of persons who don’t ordinarily live here.

In terms of Section 3(2) of the Estate Duty Act No 45 of 1955 (the Act), foreign property is – for the purposes of South African estate duty – included as property in the dutiable estate of a person who ordinarily lives in this country.

DEDUCTIONS AND EXCLUSIONS

In terms of Section 4A of the Act, a deduction of R3.5 million is allowed when determining the amount of estate duty to be paid. Deductions are also allowed for liabilities, bequests made to qualifying public benefit organisations, and property accruing to surviving spouses – either in terms of a will or by intestate succession.

In respect of the estate of a person dying on or after 1 January 2009, all benefits – including lump-sum benefits, payable from South African pension, provident and/or retirement annuity funds – are not deemed as ‘property’, and therefore not subject to estate duty.

LIFE INSURANCE POLICIES

In terms of Section 3(3)(a) of the Act, the proceeds of a life insurance policy are seen as property in the estate of a deceased person, except if:

The policy is recoverable by the surviving spouse or child of the deceased under a duly registered ante- or post-nuptial contract for estate duty purposes
The Commissioner is satisfied that:
- the policy was acquired by a person who on the deceased’s date of death was his or her partner, or held any share or interest in a company in which the deceased on that date held any share or interest
- no premium on the policy was paid by the deceased.

The Commissioner is satisfied that:
- such policy was not effected by or at the instance of the deceased
- no amount due under such policy has been or will be paid into the estate of the deceased
- no such amount has been or will be paid to, or used for the benefit of, any relative of the deceased or any person who was dependent on the deceased, or any company that was at any time a family company in relation to the deceased.

The life insurance policies referred to above include policies where a spouse or child are nominated beneficiaries, buy and sell policies, and key-person policies that conform to the conditions as set out in the Act. It’s important to note that endowment policies (local and offshore) that don’t pay out on the death of a life assured, but are owned or part owned by a deceased policyholder, will be subject to estate duty. The surrender value of the policy must be included as property in the deceased estate.

IMPACT OF RATE INCREASE

What are the practical implications of the estate duty rate increase as announced in the Budget Speech? The impact can be illustrated by the following example:

For an estate with a gross value of R50 million, with a bequest of R5 million to the surviving spouse:

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For further information or advice, please contact Ken Newport at kenn@privatewealth.sanlam.co.za or on 011 778 6659.