The announcement in the recent budget speech that the rate of estate duty will be increased to 25% in respect of that portion of a deceased estate exceeding R 30 million prompts the question – how can estate duty be avoided or at least limited?

The use of an inter-vivos trust to “peg” the value of one’s estate is still an option.  The method generally used is to transfer growth assets such as shares, unit trusts or property to an inter-vivos trust at current market value and by so doing the increasing value of such assets takes place in the trust and therefore does not form part of one’s estate.  The problem with this is the introduction of Section 7C of the Income Tax Act with effect from 1 March 2017 which states that the difference between the official rate of interest (currently 7.75%) and interest actually charged on a loan from a connected party to a trust will be deemed to be a donation and will be subject to donations tax of 20%.  As the transfer of growth assets to a trust is usually financed by way of an interest-free loan account, the donations tax payable every year in terms of Section 7C has effectively stopped inter-vivos trusts being used for saving estate duty.

Retirement annuities should be considered as another option to save estate duty.  One is allowed to contribute 27.5% of one’s taxable income subject to a maximum of R 350,000 in any one tax year in order to receive a tax deduction on this contribution.  Should contributions be made in excess of the tax-deductible amount, the excess is carried forward and can be used as a tax-deduction in the following year.  From an estate duty point of view, the funds invested in an RA are not subject to estate duty but the amount of the deceased’s contributions to an RA which have not been allowed as a tax deduction are deemed to be part of one’s estate.  Consideration can be given to making a large one-off contribution or regular contributions to an RA to achieve the following:

  • No tax on interest, dividends or capital gains is payable within the RA.
  • On death the funds in the RA will not be subject to estate duty.
  • A tax deduction can be claimed every year based on one’s taxable income until the total amount contributed has been claimed as tax deductions.
  • The portion of the RA contribution which has not been allowed as a tax deduction prior to death will be deemed to be part of one’s estate but the likelihood is that the value of the funds in the RA (not subject to estate duty) will be well in excess of the non-allowed portion especially if a long period of time has elapsed from the date of the contribution to date of death.

The tax advantages one gains from contributions to RA’s must be weighed up against the following:

  • On retirement from the RA, the full amount can be taken if the RA is below R 247,500, otherwise a maximum lump sum of 1/3 of the capital can be taken; the remaining 2/3 must be annuitised and the annuity payments are fully taxable;
  • The first R 500,000 taken as a lump sum from any retirement funds is tax-free; the next R 200,000 is taxed at 18%; the next R 350,000 is taxed at 27% and any amounts exceeding R 1,050,000 are taxed at 36%;
  • On death the beneficiary or beneficiaries can choose to receive their benefit as a cash lump sum or as an annuity or as a combination of the two. The annuity income will be taxed in the hands of the recipient whereas any lump sum payment will be taxed as though it had been received by the deceased on the day before his death.  Therefore if the deceased had not during his lifetime taken any lump sums from retirement funds, the beneficiary will receive the first R 500,000 of his or her lump sum payment free of tax.