An increase in the estate duty rate and a potential doubling of the capital gains tax rate for individuals are pitted as potential additional revenue sources to make up for increasing budget shortfalls.
This, together with recently introduced changes to the taxation of interest free loans to trusts – that devilish estate planning tool – has the potential of filling government coffers with an additional R3 billion to R5 billion per annum.
The recommendations of the Davis Tax Committee on estate duty and donations tax is expected to feature in Finance Minister Pravin Gordhan’s budget speech later this month (February 22).
• The committee has recommended an increase in taxable estates from R3.5 million to R15 million at 20%, with an additional 5% on estates worth more than R30 million. The recommendations may bring relief for the Average Joe, but for the wealthy it is a problem. So the average person could get relief is the ceiling for liability of Estate Duty is set at R15 million.
Currently only estates valued below R3.5 million are excluded from estate duty and the exclusion from capital gains tax (at the year of death) has remained R300 000 since 2012.
The report refers to figures from SARS which show that the value of the majority of estates (1 310 out of 1 445) is less than R15 million.
• The committee has also recommended that the roll-over relief for spouses be scrapped so that everyone – whether married or not – are taxed the same alive and in death.The roll-over relief currently means no estate duty, donations tax or capital gains tax if the assets of the deceased are left to the surviving spouse. Taxation is only triggered on the death of the surviving member of the marriage. In practice, as the first dying did not use the basic deduction of R3,5 mil, the full R7 mil could be used as a deduction on the death of the second dying.
If this recommendation is implemented transactions between spouses will start to fall within the tax net, potentially triggering capital gains tax and donations tax.
The capital gains tax and donations tax will be applicable if there are transfers of assets between couples (living and deceased), even if the size of the estate was less than the proposed R15 million or R30 million. It also means that the same assets could be taxed twice!
The rates of estate duty and donations tax were reduced from 25% to 20% in 2001 when capital gains tax was first introduced to counter the double taxation at death (estate duty and capital gains tax).
The Davis Tax Committee states in its final estate duty report that even if the general abatement (exclusion) was increased to R7.5 million it would not represent a “complete solution”.
“It is not difficult to imagine that a taxpayer’s modest primary residence and personal effects could easily exceed R3 million, leaving but R4.5 million remaining to cover savings, investments and life insurance benefits,” the report says.
“This may be sufficient to provide for the modest maintenance of a retired widow(er) for five to ten years, but would be totally insufficient to cover the needs of a middle class family following the death of a breadwinner.”
Experts warn that the increase of taxable estates to R15 million will be a relief for the Average Joe, but Mr Moneybags is clearly targeted with the proposed increase in estate duty, the scrapping of the roll-over relief for couples and the taxing of interest free loans to trust. Furthermore, it is possible that the inclusion rate for capital gains can “easily” be increased from 40% to 80%, raising the effective capital gains tax rate for individuals to the same level as trusts (32.8%).
Middle class people with an estate below R3.5 million have no need to do any planning to avoid estate duty, however it is still important to plan to ensure the surviving spouse is and de[pendants are taken care of
Watch this space for a further discussion after the BUDGET SPEECH
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).
Adjusted from Moneyweb