CGT, estate duty and income tax upon death
Any tax-structuring should always take cognisance of its impact on other taxes. For CGT purposes, the default position is that a deceased person is assessed on a ‘deemed disposal’ as at date of death, with the death-exclusion currently being R300 000.
If the executor realizes assets, the estate is assessed to CGT, on the actual disposal proceeds less market value at date of death. The estate is a taxpayer in its own right, under s 25 of the Income Tax Act, and is taxed at the rates for natural persons, excluding the income tax rebates, but with the annual exclusion for CGT purposes.
If an asset is awarded by the executor to an heir who realizes it, the heir is assessed to CGT, on the actual disposal proceeds less market value at date of death, with the CGT exclusion.
Which is to be preferred?
Scenario 1 is to be preferred for CGT purposes, should an heir enjoy additional taxable income or capital gains—which would increase the effective CGT rate—unless the maximum rate has already been reached.
(If a spouse is the heir, there is a deferral, under s 9HB, and, upon any subsequent disposal, CGT is levied on the actual proceeds less the original base cost to the predeceased spouse.)
Bear in mind, first, that from an estate duty point of view, if an asset is realized by the executor at a higher value than its market value at the date of death, under scenario 1 a higher estate duty liability would arise than under scenario 2.
Secondly, from an Income tax perspective, a deceased estate is not entitled to normal tax rebates, and, given that CGT is part of the tax system (40% capital gain inclusion rate, to which the marginal income tax rate is applied), this restriction could impact upon the ultimate income tax liability on income (including the capital gains inclusion) accruing to an estate that is the taxpayer.
The moral is that tax-structuring cannot be viewed from the perspective of any single tax, since the tax types are intertwined.