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Will you be paying more for Nkandla than you have to – even after death?

27 October 2015   (0 Comments)
Posted by: Author: Braam Matthee
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Author: Braam Matthee (On Your Side)

Braam Mathee discusses the amount of tax payable on the estate of a deceased.

It may be that death and taxes are the only two certain things in this life, as Benjamin Franklin claimed. But the amount of tax we must pay when we die is by no means certain. 

Even though the legislated estate duty rate is 20 per cent, the effective tax rate that is applied by SARS, in most instances, is 25 per cent. By effective tax rate, I mean the actual tax, reflected as a percentage of the actual cash received by beneficiaries (not taking into account the non-dutiable portion of the estate).

I recently became aware of a ground-breaking tax judgment delivered in the year 2000, C:SARS v Estate Late W E Frith, that outlawed this excessive estate duty calculation method for estates where the residue is left to the surviving spouse. The same principles would apply to estates where the residue is left to a tax-deductible charity. Essentially, as long as the residue is left to a tax-deductible person such as the surviving spouse or an approved charity, the estate duty would only be the 20 per cent rate instead of 25 per cent, saving a quarter of the amount that one would otherwise pay in estate duty.  

But, you might think, I don’t have a surviving spouse and I don’t want to leave my money to a charity; I want to leave everything to my loved ones. The thing is, your loved ones will not get any less if you do it in this way. The only "beneficiary” of your estate that will get less is the state (in estate duty), with that amount going instead to your surviving spouse or the charity that you have nominated. Let me explain this by way of an example.

Sue has an estate with a net asset value of R4,5 million. The estate can devolve to Sue’s beneficiaries as follows: either she bequeaths R3,5 million to her children and the residue to her brother, or alternatively she bequeaths R3,5 million to her children, R800 000 to her brother and the residue to a charity. These scenarios are explained below.

Bequests in terms of the will:

Based on the above example, both Sue’s children and her brother will receive exactly the same amount in will 1 and will 2. The only difference is your contribution to Nkandla will be R40 000 (or 20 per cent) less and the charity (or your surviving spouse) will get that portion instead. Of course, the bigger your estate, the bigger the difference. This difference is R40 000 for every million Rand of value in the estate.  

It is even possible for some of this extra value to accrue to the heirs other than the surviving spouse or charity, which you can see in the example of will 3.

If your assets, including your life insurance proceeds, exceed R3.5 million, this is something you need to think about. Are you just going to sit there and think, "Hmm, interesting”, or are you going to phone your advisor today and make some changes to your will? Everybody that reads this article is probably already contributing to Nkandla, against their will. Let’s not do so more than is necessary.

This article first appeared on the September/October 2015 edition on Tax Talk.


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