Picture: 123RF/RAZIHUSIN
Picture: 123RF/RAZIHUSIN

Wealthier taxpayers may not have been hit with a wealth tax in this year's budget, but they will pay more tax.

One of the taxes aimed at the wealthy is a higher estate duty rate of 25% on estates of more than R30-million as from March 1. The rate at which estates under R30-million are taxed remains 20%.

It is also proposed that donations tax be aligned with the estate duty, so from March 1 a new donations tax rate of 25% will apply to donations above R30-million while donations below this amount that exceed the R100000 exemption will continue to be taxed at 20%.

This is to prevent taxpayers simply donating their assets just before they die in order to avoid estate duty.

Wealthy taxpayers often use trusts to avoid estate duty, but policymakers have had their sights set on these structures for some time. In March last year, a tax amendment put the brakes on taxpayers using low- or no-interest loans to move assets out of their estates and into trusts at minimal tax rates.

This is the first estate duty change despite the number being considered by the Davis tax committee, including:

• The introduction of a wealth tax or annual payment on assets;

• The removal of what is known as the "conduit principle", which is a huge benefit of a trust. The conduit principle is where the nature of income in the trust remains the same when passed from a trust to a beneficiary. There is an advantage in that a beneficiary may have a lower tax rate than that of the trust;

• An increase in the amount in your estate that does not attract estate duty, from R3.5-million to R15-million;

• An increase of the capital gains exemption at death from R300000 to R1-million;

It's not a wealth tax, but it certainly acts like one, particularly at death
Errol Meyer
Standard Bank Financial Consultants

The repeal of the exemption from estate duty of amounts left to spouses; and

• The repeal of the exemption from donations tax of amounts donated between spouses, except for reasonable maintenance.

Hilary Dudley, MD at Citadel Fiduciary, says we are entering the fourth financial year with lingering uncertainty over future increases in wealth and estate duty taxes.

And you may be wondering how much revenue the introduction of higher rate of estate duty on estates over R30-million will generate, given that relatively few people in this income bracket die each year - and that real wealth already lies in trusts.

Tertius Troost, a tax consultant at Mazars, says the Budget Review notes that the increase in estate duty is expected to provide additional tax revenue of only R150-million.

It seems quite a "pointless increase", but it may have been introduced because estate duty applies to wealthier taxpayers, he says.

Errol Meyer, the head of advisory services at Standard Bank Financial Consultants, says wealthy taxpayers who have much or all of their wealth in trusts will now benefit from greater estate duty savings.

6 years

The time it takes to pay off credit card debt of R80 000 at an interest rate of 20.75%

But trusts attract costs and other taxes that are higher than those that apply to individuals.

The new estate duty and donations tax rates mean wealthier taxpayers need to consider how much cash is needed by their estate to pay for taxes and other estate costs.

Liquidity and cash flow are key when it comes to estate planning, he says.

Meyer advises the holders of business assurance which covers key people or business liabilities to urgently review their cover in light of the new tax rates. It is not uncommon for business owners to have life assurance up to R100-million, he says.

While the Estate Duty Act entitles the executor of the estate to claim back the duty owed from the business that receives the proceeds of a policy, there could be a shortfall in the after-tax benefit.

To counter the impact of the tax on life policy proceeds, the cover amount should be increased.

Meyer says many people focus on and plan for estate duty but forget about a far more onerous tax - capital gains tax. While the tax was not raised in this year's budget and is not a wealth tax "it certainly acts like one, particularly at death", he says.

When you die, your estate generally has to pay capital gains tax on all your assets barring the first R300000, personal use assets and assets that you leave to your spouse.

However, when your spouse dies, capital gains tax becomes payable on the full value of the estate after the estate duty exemption.