Estate planning is front and centre for most high-net worth individuals and families to preserve their wealth efficiently whilst paying fair taxes. The Estate Duty Act 45 of 1955 (“Estate Duty Act”) determines the taxation of estates in South Africa upon death. One valuable provision in the Estate Duty Act is section 4(e)(ii) relating to donations and inheritances received by South African tax residents from non-residents.
This article sets out the application of section 4(e)(ii) with practical implications to consider.
Understanding Section 4(e)(ii) of the Estate Duty Act
Section 4 of the Estate Duty Act sets out deductions that may be subtracted from the total value of the deceased’s estate to determine the (estate) dutiable amount. These deductions help reduce the deceased’s overall estate duty liability. Generally estate duty is levied at 20% on a dutiable amount of up to R30 million and 25% over R30 million.
Section 4(e)(ii) specifically allows for a deduction from a tax resident deceased’s estate of any donation or inheritance received from a non-resident donor or deceased person during their lifetime. This means that this donation or inheritance will not be subject to estate duty in South Africa, provided certain conditions are met, i.e.
- It appliesto both donations and inheritances received by a tax resident from a non-resident as well as the growth thereon or assets acquired as a result thereof. For example, if an investment portfolio was donated in 2010, the market value as at the date of death will be included in the calculation as a deduction and not just the market value when received in 2010. Similarly, if a cash amount was inherited and the heir decides to purchase a beach property, the property’s value as at the date of death will be included in the calculation as a deduction and not the original purchase price. These examples are subject to supporting documentation as set out below being available to rely upon;
- Donor or deceased must be a non-resident: The exemption only applies if the donor (in the case of a donation) or the deceased (in the case of an inheritance) was not ordinarily resident in South Africa at the time of making the donation or upon death;
- The deduction applies to the tax resident donee’s or heir’s estate: The amount received due to a donation and / or inheritance is excluded from the dutiable amount of the South African resident when passing away, assuming that the donation / inheritance is still an asset in the estate at death and can be supported with the relevant documents.
Practical implications for estate planning
To ensure that the deduction is successfully claimed, the following should be considered:
- Only the net value of assets is subject to estate duty. Accordingly, the value of assets so inherited or received as a donation as well as any subsequent growth in their value or the value of assets acquired using those funds, is deducted from the net asset value to arrive at the dutiable amount on which estate duty is levied;
- Supporting documentation should be collated of the donor’s or deceased’s non-resident status, as well as the inheritance received or donation made (e.g. bank statements of the donor and donee, deed of donation, copy of the will, confirmation of inheritance received, etc.
- It is recommended that the amount received by either donation or inheritance is ringfenced to be easily identifiable upon the recipient’s passing.
- The deduction applies to the recipient’s estate, and not to the income derived from the donation or inheritance which may still be subject to income tax (e.g. interest earned on theasset, rental income, etc).
- With reference to donations tax: the donor of the donation is liable for donations tax in SA at the time of making the donation, unless the donor is a non-resident in which case donations tax will not apply in SA.
Section 4(e)(ii) of the Estate Duty Act could be helpful for estate planning purposes, if it is carefully executed with appropriate supporting documentation. As with all cross-border tax planning, professional advice is vital to ensure full compliance with both domestic and international tax laws.
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).