Estate duty now kicks in at R2,5 million

Redistribution of wealth occurs through taxation on death in many countries and it's long been a feature of the tax regime in South Africa. South African death duty - Estate Duty - has led to the development of numerous estate-planning techniques, whichhave been countered by the introduction of Capital Gains Tax and Donations Tax.

"The motivation behind a tax such as Estate Duty is to add to the revenue of the state by taxing wealth. It's meant to give the heirs of a wealthy person who has died the bulk of the assets, while also providing a contribution to State coffers. Its intention has never been to leave an heir in an indigent state because of the taxation," explains Graham McPherson, Managing Director of First National Bank's (FNB) Trust division.

In recent years, however, the tax has become a problem in the estates of many middle-income earners. The cause, according to FNB, is the rapid rise in the value of property in South Africa.

“Since a house is usually the biggest asset in any estate, the recent enormous increase in property values has brought many additional estates into the Estate Duty net," comments McPherson.

“This means that more and more estates of people who were never really wealthy are being hit by what is meant to be a wealth tax."

Since 2001, Estate Duty has been levied at a rate of 20% on the net value of assets in a deceased estate over R1,5-million. This means that, in an estate worth below R1,5-million, no tax would have been levied.

For the average middle-class person in 2001, it was quite feasible that their assets would total less. "The average house price nationally that year was about R285 000, so a person could comfortably have had over R1 000 000 in additional assets - maybe a capital sum invested for income for the retirement years - and not have run the risk of Estate Duty when he died," notes McPherson.

The average house price, however, has risen by 89% nationally since then, and so the risk of Estate Duty coming into effect is very real. In 2001, the average house in KwaZulu-Natal had a value of R217 000; by the end of last year, it had increased to R554 000.

McPherson explains that if the total value of the estate in 2001 was R1,5-million, this value would have risen by at least R335 000 five years later. “This would bring the estate into the net for the tax to apply. On this additional amount, the estate would now have had to come up with R67 000 for the tax liability," he adds.

The recent budget at long last recognises this situation. Estate Duty will now only kick in on an amount over R2.5-million, which will certainly ease the tax burden for many deceased estates. The difference in the amount exempted from Estate Duty has risen by 67%, which is still less than the average house value increase. “However,” concludes McPherson, "it certainly represents a change in the right direction.”

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