Estate duty, like most taxes, is inherently complex. However, several core principles are straightforward enough for any layperson to understand. This article is not a comprehensive guide to every aspect of estate duty, but it will equip readers to discuss the essentials with their estate planner or financial adviser.
A key starting point is that an “estate” and an “estate for estate duty purposes” are not the same thing. Estate duty is levied on a worldwide basis. If the deceased was ordinarily resident in South Africa at the time of death, all property owned in South Africa and abroad –subject to certain exclusions – forms part of the estate for estate duty purposes.
In addition to actual property, the Estate Duty Act includes deemed property. This category covers rights attached to property, such as usufructs and fideicommissa (conditional legal arrangements), as well as the proceeds of life insurance policies payable to beneficiaries other than the estate. These deemed assets can significantly increase an estate’s value for estate duty calculations.
Valuation of property
The general rule is that property must be valued at its market value. If an asset is sold bona fide during the estate’s liquidation, the sale price is accepted as the asset’s market value. Where property is not sold, an appraiser appointed under section 6 of the Administration of Estates Act determines the fair market value.
There are two notable exceptions:
- Shares in a private company must be valued according to a SARS‑approved valuation, regardless of any other valuation method or even if the shares are sold.
- Farming property used for bona fide farming operations may be reduced by 30% for estate duty purposes, offering substantial relief to farming families.
Valuation of limited interests
Limited interests – such as usufructs and fideicommissary rights – are valued using a statutory formula: Value of property X 12% X factor of the new beneficiary.
Given current economic conditions, very few assets yield 12% annually. As a result, the formula often inflates the value of a ceasing usufruct. It is therefore advisable for the executor to request SARS approval to use a lower percentage. A reduced rate can significantly decrease the value of the ceasing usufruct and, consequently, the estate duty payable.
Deductions allowed
The Estate Duty Act provides for a wide range of deductions. Although it is impossible to list them all, the most common include:
- Reasonable funeral expenses, including the cost of a tombstone.
- All liabilities legally due by the estate.
- Administrative expenses allowed by the Master.
- Accrual claims.
- Bequests to approved public benefit organisations.
- All benefits accruing to the surviving spouse because of the deceased’s death, including policies payable directly to the spouse.
After deducting these expenses and allowances, the net estate is further reduced by a basic rebate of R3.5 million. In certain circumstances – where the deceased was predeceased by one or more spouses – the rebate may increase to R7m.
Estate duty rates
Estate duty is levied on the dutiable amount of the estate at the following rates:
- 20% on the first R30m.
- 25% on any amount above R30m.
These progressive rates mean that high‑value estates can face substantial estate duty liabilities.
Liability for estate duty on deemed assets
Beneficiaries of deemed assets – such as the beneficiary of a domestic life policy or the next beneficiary of a usufruct or fideicommissum – must contribute pro rata to the estate duty attributable to those assets. This ensures that the estate itself does not bear the full tax burden on assets that do not accrue to it.
A common practical issue arises when a child takes out a policy on a parent’s life. At first glance, this appears harmless to the other children, who are often the residual heirs, because the child who owns the policy is responsible for the pro rata estate duty attributable to the policy proceeds. However, the existence of such a policy can increase the value of the estate for estate duty purposes and may push an estate from non‑dutiable to dutiable. When this happens, the estate’s overall estate duty liability increases, and that additional duty is paid from the residue. The result is that the inheritances of the residual heirs are reduced, even though the policy was intended to benefit only the child who took it out.
This problem is best addressed in the will. The testator should specify that any estate duty payable by the estate arising from a policy taken out by a child on the testator’s life must be borne solely by that child. Clear drafting prevents disputes and ensures fairness among heirs.
Jan du Plessis is the chief executive of the Fiduciary Institute of Southern Africa.
Disclaimer: The information in this article is a general guide and should not be used as a substitute for professional advice on estate planning.
