TAX AND INHERITANCE
Some key terms before we begin…
When someone dies they normally have a ‘will’. The people who benefit from this ‘will’ are known as the heirs. The heirs receive an ‘inheritance’. The person who has died is referred to as the ‘deceased’. And the money, property and belongings they left to their heirs is called an ‘estate’. And finally the person who administers the will of the deceased is invariably called an ‘executor’. So now we’ve got the terminology in place, let’s answer those key questions.
Do I need to pay tax on money I inherited?
An asset acquired by a SA resident heir by inheritance from a SA resident or non-resident deceased estate is what is described as a ‘capital receipt’ and is therefore not included in the heir’s gross income. In South Africa, there is therefore no tax payable by the heirs who get an inheritance. Capital Gains Tax (CGT)
is also not payable by the recipient of an inheritance. Estate Duty
, where applicable, are usually payable by the estate. If it is a foreign estate, it will be subject to the taxes of its country of origin.
Are donations or gifts different from an inheritance?
Yes, for tax purposes, donations and gifts are treated differently to inheritances. For individuals, donations are subject to a Donations Tax
of 20%, with an annual exemption of up to R100,000 of the value of all donations made during the tax year. For example, if a once-off donation of R80,000 is made by an individual, no tax is payable, but if a donation of R140,000 is made, then Donations Tax of R8,000 is payable (20% of the amount exceeding R100,000, which is R40,000). For companies or trusts, the exemption for casual gifts is up to R10,000 per tax year.
Non-residents are not subject to Donations Tax
. However, in cases where the resident donor transfers his property to a non-resident (donee), and the resident donor fails to pay the Donations Tax
, the non-resident (donee) and the resident (donor) will be jointly and severally liable for the tax. Donations between spouses are exempt from Donations Tax
, as are donations made to certain public benefit organisations. Read more on Donations tax
How does Estate Duty work in relation to an inheritance?
All income received or accrued before the deceased’s death is taxable in the hands of the deceased up until date of death, and will be administered by the executor or administrator acting as the deceased’s representative taxpayer. After the date of death of a person a new taxable entity comes into existence – the “estate”. The assets of the deceased will be held by the estate until the liquidation and distribution account has lain for inspection and become final under section 35(12) of the Administration of Estates Act after which the assets will be either handed over to the heirs or delivered to the trustee of a trust estate.
Income, which accrues to the estate after the death of the deceased but before the distribution of the assets to the beneficiaries, is dealt with under section 25 of the Income Tax Act.
The estate of a resident deceased individual is subject to 20% Estate Duty
, after taking into account a deduction of
R3.5 million against the net value of the estate. So, if the total net value of the estate is R4 million, Estate Duty
will be dutiable on 20% of the amount exceeding R3.5 million which amounts to R100,000 (20% of R500,000). It is normally the responsibility of the executor to pay the duty as levied on the property of the deceased. However, a beneficiary of deemed property e.g. a policy paid on the life of the deceased and the person to whom the limited right accrues is liable to pay the pro rata share of duty attributable to the advantage which accrued to the person.
Resident individuals are subject to tax on their worldwide income (both sources in and out of South Africa). The exception to this rule is when there is Estate Duty
on properties owned by a resident. Although a resident’s property is subject to Estate Duty
wherever it is situated, properties located outside South Africa are not subject to Estate Duty
if they were acquired prior to residency (first time) or were inherited and donated by a non-resident after the deceased became a permanent resident of the country. The calculation of Estate Duty
is the same for both residents and non-residents. Read more on Estate Duty
How does Capital gains tax work in relation to an inheritance?
Any Capital Gains Tax
which would be due is payable before the inheritance is transferred to the beneficiaries. The acquisition of an asset does not give rise to a capital gain at the time of inheritance, and any capital gain or loss is only worked out under the Eighth Schedule when the asset is ultimately sold or got rid of. Read more on Capital Gains Tax
What legislation affects inheritances?
South Africa’s inheritance laws apply to every person who owns property in South Africa.
The three main statutes governing inheritances in South Africa are:
- The Administration of Estates Act, which regulates the disposal of the deceased’s estates in
- South Africa;
- The Wills Act, which affects all testators with property in South Africa;
- The Intestate Succession Act, which governs the devolution of estates for all deceased persons who have property in the Republic and who die without a will.
All property located in South Africa is subject to these laws, and there are no separate laws for foreigners. Immoveable property is not treated any differently to other types of moveable assets for inheritance purposes. Inheritance issues of foreigners and South African citizens are primarily dealt with by the Master of the High Court; however if a dispute arises, then the case can be heard in any High Court of South Africa.
Foreigners who acquire immovable property in South Africa through purchase or inheritance must register their transfer of ownership by registering a deed of transfer with the Registrar of Deeds in whose area the property is situated. The process of registering a deed of transfer is carried out by a conveyancer, or specialised lawyer, who acts upon a power of attorney granted by the owner of the property. Foreigners should ensure their title deeds are endorsed ‘non-resident’ so that, if they eventually sell the property, they have no difficulty repatriating the proceeds.
The South African government has agreements to avoid double death duties with Botswana, Lesotho, Swaziland, Zimbabwe, Sweden (terminated with effect from 1 January 2005), the United Kingdom, and the United States of America. For agreements, click here