Changes to Taxes on Estates

Tim Desmond

The draft Taxation Laws Amendment Bill, 2009, released recently for public comments, contains two significant estate duty amendments. The first constitutes a concession, while the second is an anti-avoidance provision.

The proposed concession relates to the R3.5 million abatement allowed in calculating the dutiable value of any estate. In terms of current law, spouses are each entitled to the abatement, but unused portions may not be transferred between them. The draft explanatory memorandum to the draft bill recognises that many married couples utilise structures, such as trusts, to ensure that the benefit of the total R7 million abatement is passed on to their children.

The draft bill proposes a simpler method to achieve the above objective. If a married person leaves all of his assets to his surviving spouse, that surviving spouse will be entitled to a R7 million abatement on her death. If a person dies leaving multiple concurrent spouses, the additional abatement will be apportioned amongst them according to the assets left to each of them.

The proposed concession will only be applicable to simple wills leaving all of the deceased’s assets to a surviving spouse(s). If a will is any more complicated, then the usual estate planning mechanisms will be necessary. The draft explanatory memorandum states that persons with more complicated wills, in any event, will have to consult an attorney and can employ appropriate estate planning measures.

The proposed anti-avoidance provision relates to an often used estate planning measure that is regarded as an abuse of the legislation. It involves a spouse leaving a usufruct (conferring a right of use, rather than ownership) over his assets, to his surviving spouse. This is done on the basis that, on the surviving spouse’s death, the usufruct is transferred to another person, often a trust, for one year. The underlying property is then transferred to the ultimate heirs – such as the children of the spouses. The intervening one year usufruct serves to reduce the value, for estate duty purposes, that must be included in the second-dying spouse’s estate.

The perceived loophole is proposed to be closed by providing that all usufructs be valued over the expected lives of the beneficiaries. The approach is likely to be widely regarded as broader than is necessary to close the perceived loophole, especially where the usufruct was originally for a limited period only.

It is proposed that both amendments will apply to the estates of persons dying on or after 1 January 2010.