UNDERSTANDING ESTATE DUTY: A SIMPLIFIED GUIDE TO CALCULATING THE DUTIABLE VALUE OF YOUR ESTATE

Mohamed Raees Hussain | Legal Advisor

Planning your estate is about more than just deciding who inherits your assets. It also involves understanding how much of your estate will be subject to estate duty. Estate duty is a tax levied on the dutiable value of your estate when you pass away. 

Knowing how to calculate the dutiable value can make a significant difference in how much your beneficiaries ultimately receive. In this article, we’ll break down the process of calculating the dutiable value of your estate, explaining deductions and rebates that can reduce estate duty.

What is the dutiable value of an estate?

The dutiable value of an estate is the net value of all the assets you leave behind after allowable deductions and rebates have been subtracted. This value forms the base on which estate duty is calculated. In South Africa, the current estate duty rate is:

  • 20% on estates valued at R30 million or less.
  • 25% on the portion of estates that exceed R30 million. 

How is the gross value of an estate determined?

The gross value of your estate includes all your assets and interests at the time of death. This encompasses:

  • Immovable property such as homes, farms, and commercial real estate.
  • Movable assets like cars, furniture, art, jewellery, and personal belongings.
  • Investments including shares, unit trusts, and other financial instruments.
  • Cash held in savings accounts or any other liquid form.
  • Life insurance policies paid to your estate (not directly to beneficiaries).
  • Business interests such as shares in private companies or partnerships.

The total value of these assets forms your gross estate value. This is the starting point for calculating estate duty.

What deductions can be made to reduce the dutiable value?

Deductions play a critical role in reducing the dutiable value of your estate. These allowable deductions are defined by the South African Income Tax Act and other Regulations. Here are the key deductions you can claim:

  1. Debts and liabilities

Any debts or liabilities that were outstanding at the time of your death can be deducted from the gross value of your estate. These include:

  • Mortgage bonds: If you had a home loan on any property in your estate, the outstanding balance is deductible.
  • Personal loans: Any unpaid personal loans or credit card debt.
  • Medical bills: Unpaid medical expenses or hospital bills.
  • Outstanding income tax: Taxes that were due but not yet paid before your death.
  1. Funeral and administration costs

Expenses related to your funeral and the administration of your estate can also be deducted. These may include:

  • Funeral costs such as burial, cremation, and ceremonies (within reason).
  • Executor’s fees: The fee paid to the executor for handling the estate.
  • Legal fees and valuation costs incurred in administering the estate. 
  1. Bequests to a surviving spouse (Section 4(q))

One of the most significant deductions available is for assets left to a surviving spouse. Under Section 4(q) of the Estate Duty Act, all assets passed to a spouse are fully exempt from estate duty. This deduction applies to both civil and customary marriages, as well as registered domestic partnerships.

  1. Charitable donations (Section 4(h))

Bequests made to registered public benefit organizations or charities are exempt from estate duty. This is an effective way to reduce the dutiable value of your estate while supporting a cause that matters to you.

  1. Assets not forming part of the estate

Certain assets do not form part of your estate for estate duty purposes, such as proceeds from life insurance policies where the beneficiary is someone other than the estate. Additionally, payouts from approved retirement funds (like pensions or provident funds) are not subject to estate duty.

How does the Section 4A rebate affect the calculation?

The Section 4A rebate is a tax-free threshold applied to all estates. Currently, the first R3.5 million of the dutiable value is exempt from estate duty. For married individuals, the unused portion of a predeceased spouse's Section 4A rebate can be transferred to the surviving spouse’s estate.

This rebate is applied after deductions are made, reducing the taxable portion of the estate significantly.

How do I calculate the dutiable value of my estate?

To calculate the dutiable value of your estate, follow these steps:

  • Determine the gross value of your estate: Add up the market value of all your assets.
  • Deduct allowable expenses: Subtract liabilities, funeral costs, and administration expenses.
  • Apply the Section 4(q) deduction: Subtract the value of any assets left to your spouse.
  • Account for charitable donations: Subtract any bequests to public benefit organizations.
  • Apply the Section 4A rebate: Deduct R3.5 million.
  • The remaining value is the dutiable value of your estate to which the current estate duty rate is applied.

Understanding how the dutiable value of your estate is calculated is an important part of estate planning. By familiarizing yourself with allowable deductions, exemptions, and the Section 4A rebate, you can reduce your estate’s tax liability and ensure more of your wealth is passed on to your heirs. Consulting with a financial advisor or estate planner can help you develop strategies to minimize estate duty, ensuring that your loved ones benefit from your hard-earned legacy.

 

*The above is for general information purposes and should not be construed as advice, for legal and tax advice relating to Estate Planning, including Estate Duty, it is recommended that you seek guidance and advice from a suitably qualified Legal Practitioner, Accountant, or Tax Practitioner*