Category Life Insurance

The Budget Speech – Estate Planning and Deceased Estates

23 February 2012 Johann Jacobs (FISA member), Director and National Practice Head, Trusts and Estates, Cliffe Dekker Hofmeyr

From an estate planning and deceased estate perspective, the 2012 budget was on critical analysis much more eventful than it appears at first blush.

The most prominent tax currently payable pursuant to the death of an individual is estate duty in terms of the Estate Duty Act 45 of 1955 as amended (sometimes quaintly referred to as death duties).

In essence, currently estate duty is payable at a flat rate of 20% on your net estate (in other words, after payment of all liabilities) over R 3, 5 million.

If one has reference to the increase of the threshold at which duty becomes payable from R1.5 million in 2002 to R3.5 million in 2007 it appears there has been a general move towards the relaxation of estate duty. This introduction of the so-called portable estate duty in the 2010--whereby for all purpose the threshold for estate duty was raised to R 7 million per spouses as defined in the act supports this conclusion.

The pattern seemed to hint at the possible abolishment of the tax. This has led to much speculation but the topic remains a sticky point, more so however for ideological reasons than fiscal reasons.

It is well recorded that estate duty collected under the auspice of the Act does not in comparison to other tax yield a substantial contribution to the reserve of the tax collectors. It is estimated that estate duty as measured against the total tax revenue collected for the period 2008-2010 presents a meager 0.12% of taxes falling into the coffers.

With the introduction of Capital Gains Tax on the 1st of October 2001 estate duty became an onerous form of double taxation which gave fuel to the argument for the abolishment of estate duty.

Estate duty has given rise to the creation of highly complex structures and the existence of a secondary industry resulting in negative spending to avoid the payment of estate duty. To some the whole exercise seems a waste of productive time and resources. In fact this was stated by the minister to be a motivation for the introduction of the portable estate duty provisions.

A glimmer of hope for the abolishment was contained in the Minister’s Budget Speech of 2010 when he stated: “Both estate duty and Capital Gains Tax are payable on death, which is perceived as giving rise to double taxation. The estate duty raises limited revenue and is cumbersome to administer. Moreover, its efficacy is questionable: many wealthy individuals escape estate duty liability through trusts and other means. Taxes upon death will be revised.”

This theme was taken up and spelt out unambiguously in the 2011 budget speech with the Minister stating that estate duty was being reviewed and several options were under consideration.

Most commentators are in agreement that if estate duty were to be abolished one such consideration would be that it would be replaced and the obvious choice has been possible changes to the so-called Capital Gains Tax, which is tax levied in terms of the 8th schedule of the Income Tax Act. Such a dispensation could counter both ideologically and fiscal arguments for the retention of estate duty. The regime would have to be extended in respect of one or more, namely the extension of the group of assets that fall into the Capital Gains Tax net, the increase of the inclusion rate, and/or the increase of the tax payable to align the actual effective rate of the tax to donations tax and estate duty which is currently at 20%.

Capital Gains Tax is relevant to estate planning, firstly because Capital Gains Tax becomes payable on all those assets which are included assets for Capital Gains Tax purposes during one’s life on the basis that it becomes automatically payable on death in terms of a so –called deeming provision. In fact there can be two Capital Gains Tax events, the first being the gain in respect of the value of the assets which is the date of acquisition and the date of death and secondly if sold during the administration of the estate, a second event, namely the gain or loss, between date of death and the date of realization.

Despite the aforementioned development, I could find not a single reference to estate duty in general or specifically and it is anybody’s guess as to the progress of the reviews that are being undertaken by whatever body has been designated with this task or what the current thoughts are.

But maybe the answer lies in the substantial announcements made by the Minister in relation to Capital Gains Tax. The Minister has proposed that the inclusion rate in respect of which gains are taxed be increased from 25% to 33.3% in the case of individuals. Effectively the actual tax payable at the highest tax rate will now be 13.3% of the actual gain as opposed to 10%.

A possible interpretation is that although the 2011 budget speech did make a single direct reference to estate duty or mention it by name, the first extension of the capital gains tax regime since 2001 may have just signaled the first confirmation of the demise of estate duty and its replacement by a comprehensive and augmented Capital Gains Tax system.

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