Taxation of estates to also be revisited?

taxation1Authors: Hanneke Farrand and Hannelie la Grange


We previously commented on the recommendations made by the Davis Tax Committee (“DTC”) relating to the taxation of trusts in our article entitled “Taxation of trusts to be revisited?” dated 28 July 2015. We set out below our comments on the recommendations made in the DTC First Interim Report on Estate Duty (“DTC Report”) dealing with estate duty, capital gains tax (“CGT”) and donations tax.

The Minister of Finance instructed the DTC to enquire into “the progressivity of the tax system and the role and continued relevance of estate duty to support a more equitable and progressive tax system”, specifically taking into account the interaction between CGT and estate duty. To this end, the DTC Report was released for public comment on 13 July 2015.

General tax principles

Estate duty

Estate duty is payable in respect of the estate of every person who was ordinarily resident in South Africa at the date of his or her death as well as the South African situated assets of a person who was not ordinarily resident in South Africa at the date of his or her death.

Currently, in terms of section 4(q) of the Estate Duty Act No.45 of 1955 (“Estate Duty Act”), the value of all property which accrues to the surviving spouse, either in terms of a will or by intestate succession, is deductible from the gross estate of the deceased.

The Estate Duty Act further provides for a deduction of the value of any right in or to property situated outside South Africa which was acquired by the deceased before he or she became ordinarily resident in South Africa for the first time; after he became ordinarily resident by way of donation or inheritance from a person not ordinarily resident in South Africa; or out of profits and proceeds of any such property acquired out of such profits or proceeds.

The dutiable amount of any estate is calculated by deducting a R3,5 million primary abatement from the net value of the estate (primary abatement). The dutiable amount of the estate is subject to 20% estate duty. The deceased estate of a surviving spouse is permitted to utilise the unused portion of the primary abatement of any pre-deceased spouse (portable abatement).


South African residents are subject to CGT on capital gains arising from the disposal of any asset. Non-residents are subject to CGT on capital gains arising from the disposal of immovable property or an interest in immovable property situated in South Africa. CGT is levied at a rate of 13.65% in respect of individuals. An annual exclusion of R30 000 is available to a natural person in the year of assessment.

In terms of paragraph 40 of the Eighth Schedule to the Income Tax Act No.58 of 1962 (“Income Tax Act”), a deceased person will be deemed to have disposed of his or her assets to his or her estate for an amount equal to market value on the date of death. Assets disposed of to the surviving spouse of a deceased person, will, however, be exempt from CGT.

Paragraph 67 provides that a disposal by the estate of the first-dying spouse to the surviving spouse of any asset, will also be exempt from CGT.

Donations tax

Donations tax at a rate of 20% is payable on the value of any property disposed of under any donation by a South African “resident” as defined in the Income Tax Act. The first R100 000 of property donated in each year by a natural person is exempt from donations tax.

Section 56(1) of the Income Tax Act exempts, inter alia, the following donations from donations tax:

  • a donation to or for the benefit of a spouse of the donor not separated from the donor; or
  • a donation of property or a right in property situated outside South Africa if such property was acquired by the donor prior to becoming a South African resident; if the property was inherited or donated to a South African resident by a non-resident taxpayer; or out of funds from the disposal of the aforementioned property.

Recommendations in the DTC Report

The DTC recommends, inter alia, that the following amendments be made to the existing tax legislation:

  • The repeal of the exemption in terms of section 4(q) in respect of assets devolving on a surviving spouse should be considered.
  • The repeal of the portable abatement should be considered. The primary abatement of the surviving spouse may then be offset in the estate duty computation of the first-dying spouse. The estate of the surviving spouse would, as a consequence, forfeit some or all of the primary abatement in the future. The DTC acknowledges that double taxation may occur if a dutiable bequest is received by a surviving spouse who subsequently dies. This could be prevented by the development of a table excluding certain dutiable inheritances from the estate duty computation of a surviving spouse over a period of up to 10 years.
  • The primary abatement should be increased to R6 million per taxpayer. The surviving spouse will then be in a position to increase the total abatement to R12 million by electing to use the primary abatement in the computation of the estate duty of the first-dying spouse.
  • The exemption of donations between spouses should be amended to exclude all interests in immovable property or companies from its application.
  • The exemption in respect of donations of offshore assets acquired prior to becoming tax resident in South Africa, must be revisited in the light of South Africa’s change to a residence basis of taxation in 2001.

Property left to surviving spouse

Section 4(q) was originally put in place to alleviate the hardship faced by spouses who may rely on the assets held in the name of the first-dying spouse for support. In the event that those assets fell within the first-dying spouse’s estate, estate duty was leviable at the death of the first-dying spouse. This created liquidity problems in the first-dying’s estate and, as a result, certain assets had to be realised in order to cover the estate duty liability in the event that the surviving spouse was not in a position to pay that liability out of his or her own funds.

The removal of the exemption in relation to property left to a surviving spouse could, effectively, result in estate duty being payable by the first-dying’s estate in the event that the portable abatement is elected and the deceased’s estate exceeds R12 million. As mentioned above, this could create liquidity problems in the case of the first-dying’s estate in the event that such estate consist mainly of illiquid assets. Accordingly, the withdrawal of this exemption could give rise to the hardship that such exemption served to avoid in the first instance.

This recommendation also does not seem to be in line with the CGT exemptions relating to disposals between spouses.

The estate duty payable is, in our view, in any event, leviable on the surviving spouse’s estate. Taking into account that the recommendation merely accelerates the timing of the payment of estate duty, such recommendation could create unnecessary complications for spouses.

Portable abatement

In our view, in the event that the first-dying spouse has the larger estate, electing to use the total abatement in the amount of R12 million in the estate of the first-dying, could be advantageous for such first-dying’s estate. However, as acknowledged by the DTC, the estate of the surviving spouse could, as a consequence, forfeit a portion of or his or her entire primary abatement.

Donations between spouses

Donations between spouses of interests in immovable property or companies could be for reasons other than saving tax. For example, where a spouse has contributed to the repayments on a mortgage bond over immovable property, the other spouse may “donate” a portion of the ownership in such property to that spouse.

Donation of offshore assets

The current position where donations of offshore assets are exempt from donations tax make sense in light of the fact that such assets were originally acquired as a non-resident of South Africa and is not sourced from South Africa, therefore, such property should not fall within the donations tax “net”.

As acknowledged by the DTC, this exemption is consistent with a similar exemption contained in the Estate Duty Act. Therefore, in our view, revisiting this exemption does not seem to be in line with the estate duty exemption.


The DTC Report specifically states that “the tax system…is one of the most important government tools to redistribute income and address inequality”. Although this statement follows the instructions received by the Minister of Finance, in our view, it does not take into account the diverse and far-reaching implications the recommended changes to the tax system may have on, not only high-net worth individuals, but all South Africans planning their estate.

The DTC Report was, however, released in draft and is, therefore, open to comment. Following the process of consultation, the recommendations in the DTC Report may not necessarily find their way into draft tax legislation.