“Last Will and Testament – I, the testator, being of sound mind, do hereby leave and bequeath upon the South African Revenue Service, in consideration of their kindness and benevolence to me during my life-time, a cash amount to the value of 1/5th of my estate.” Seemingly an extract from the Will of a deranged madman, but in effect not necessarily beyond the realms of possibility. Estate duty can play havoc with your testamentary planning and it’s not only the mega-wealthy that should be concerned.
Death taxes – an historical perspective
Throughout the ages, governments and rulers have sought to impose new and innovative taxes on their subjects. In the 18th century, English Prime Minister William Pitt introduced a tax on windows, leading to the creation, by his opponents, of the saying ‘Daylight Robbery.’ He also introduced taxes on wig powder, playing cards, servants and dogs. The Russian leader Peter the Great introduced taxes on beards, souls, hats, clothing, food, chimneys and boots, as well as birth, marriage and burial. And in ancient Rome, Emperor Nero levied a tax on urine! However, it is the Roman emperor Augustus who is considered by many to be the most brilliant tax strategist of the

Roman Empire. He thought to levy a tax on the one event that even the smartest accountant has not yet formulated a way of avoiding: dying. Augustus instituted a death tax to provide retirement funds for his military. The tax was five percent on all inheritances except gifts to children and spouses. So innovative was this tax, that centuries later, the English and Dutch referred to the inheritance tax of Augustus in developing their own inheritance taxes.
Death taxes – the modern approach
Today many countries levy a form of death tax. A death tax usually takes one of two forms: either an “estate tax” levied on the assets in a deceased estate and payable before the estate passes on to the heirs, or an “inheritance tax” payable by the heirs in an estate. Many people view inheritance and estate taxes as being the preserve (and concern) of only the wealthy. However, in South Africa this is not necessarily the case.
What is Estate Duty?
In South Africa, our “death tax” is euphemistically called “estate duty” Simplistically, estate duty is a tax levied on an estate after a person dies and is calculated as a percentage (currently 20% but rising to 25% on estates over R30m) of the value of

the net assets in the estate, over and above a certain threshold.
How is Estate Duty calculated?
Estate duty is charged upon the “dutiable amount” of the estate. The “estate” consists of all “property” of the deceased (including immovable and movable property, investments and business interests) and in the case of SA residents, on their assets wherever in the world they are situated. In the case of couples married in community of property, it is the deceased spouse’s half-share of the joint estate that counts as the “estate”. The calculation of the value of the “property” is in most cases relatively straightforward. It is at the next stage of the calculation that events take an unexpected (and somewhat sneaky) twist. For the purpose of the calculation of estate duty, certain assets that are not property of the deceased at all are simply “deemed” by the legislation to be property of the deceased. This “deemed property” includes the proceeds of life assurance policies, including unapproved group life policies, which are payable on the death of the deceased. It is important to note that even if one has nominated a beneficiary to receive payment directly from the assurer or fund concerned, and the monies do not ever come into one’s estate, these items are still “deemed” to be assets in the estate and could attract estate duty.
What deductions are allowed?
The estate duty net is cast fairly wide.

However, there is some good news, in that certain deductions are allowed against the value of the estate before the duty is calculated. Firstly, all the deceased’s debts and liabilities are deductible: death-bed expenses, funeral costs, executor’s fees, mortgage bonds, over-drafts, outstanding loans and taxes, even any capital gains tax payable by an estate on death qualify here. Secondly, deducted from the “estate” is the value of any assets or property left to a surviving spouse or devolving on the spouse in terms of our intestate succession law. The “surviving spouse” deduction includes unmarried “life partners”, including same-sex partners. For the married person who leaves all or the bulk of their assets to their surviving spouse, the payment of estate duty on their death is avoided. However, this “avoidance” often turns out instead to be nothing but a temporary postponement of the estate duty liability. This is because often the surviving spouse on his or her death will leave the assets (which may even have increased in value) to the couple’s children, and the taxman will then receive his due from the couple’s estate.
On what size estate is the duty imposed? As estate duty is not intended to be levied on “smaller” estates, all estates qualify for an exemption (or “abatement”) from duty of the first R3.5 million of the net estate. This is increased up to a maximum of R7 million in the case of a second-dying spouse who inherited assets from their

first-dying spouse.
How much estate duty must be paid? After allowing for the deductions and abatement, the result is the “dutiable estate” – it is on this value that estate duty is calculated, currently at a rate of 20% on the first R30 million of an estate and 25% on anything in excess of that.
Capital gains tax
In addition to estate duty, Capital Gains Tax (“CGT”) is also levied on death – any capital gains (profits) made on the sale or the transfer of an asset to an heir (when one dies one is deemed to have disposed of all one’s assets at market value, although gains on assets left to a surviving spouse are ignored; the CGT on those rolls over to the spouse to be paid when he or she sells the asset or subsequently dies). The sum of all taxable gains made by the deceased is taxed in the estate, after an exemption of R300 000

in the year of death is applied.
Estate duty and CGT is payable by the executor of the estate from the assets of the estate and must be paid before inheritances can be paid to heirs. While the deceased (for obvious reasons) is in no position to be concerned with the effect of these taxes on the estate, to the heirs the effects can be devastating. Not only do these taxes directly diminish the capital an heir will inherit, but in an illiquid estate, the executor may be forced to sell valuable assets, such as the home or a family business, sometimes at knockdown prices, to finance the tax burden. Estate duty and CGT can be a crippling burden on an estate. One’s financial planning should care-fully calculate the possible burden and provide for adequate life insurance to be put in place to cover the exposure. Unlike Elvis, make sure your wealth doesn’t “leave the building”!