How is estate duty calculated in South Africa?

Estate duty is a tax on what you leave behind when you die. It is charged at 20% on the dutiable amount of an estate up to R30 million, and at 25% on any part above R30 million, after a R3.5 million abatement has been taken off. Everything you leave to your spouse is deducted before the tax is worked out. Because of those two rules, most South African estates pay no estate duty at all. Where duty is payable, the executor works it out, files a return with SARS and pays it from the estate before the heirs receive anything.

What estate duty is and who pays it

Estate duty is governed by the Estate Duty Act 45 of 1955. It is a separate tax from income tax and from capital gains tax, both of which can also arise on death. It is charged on the estate of every person who dies, and for a South African resident it covers property anywhere in the world.

The person responsible for the tax is the executor, the person appointed by the Master of the High Court to wind up the estate under the Administration of Estates Act 66 of 1965. The executor completes the estate duty return, sends it to SARS with the liquidation and distribution account, and pays the duty out of estate money. SARS is paid before the heirs. If the executor distributes first and cannot pay SARS, the executor can be held personally liable.

Step 1: Work out the gross value of the estate

Start by adding up everything the deceased owned at the date of death, valued at market value on that date:

• immovable property, such as a house or a plot
• money in bank accounts, unit trusts, shares and other investments
• vehicles, furniture, jewellery and other personal belongings
• an interest in a business or a close corporation
• money owed to the deceased, including loan accounts in a family trust or company
• any usufruct or similar right the deceased held over someone else's property

Certain things are added even though the deceased did not own them at death. The Act calls this deemed property. The most important item is the proceeds of a life policy on the deceased's life. A policy that pays out to the estate is counted. A policy that pays straight to a named beneficiary is generally counted too, though the Act excludes some policies, such as certain business policies. Ask the insurer and the executor about each one.

A lump sum paid by a pension, provident or retirement annuity fund on death is generally not included in the estate for estate duty.

Step 2: Take off the allowable deductions

From the gross value, the executor deducts:

• debts owed by the deceased at death, including the outstanding balance on a home loan
• funeral, tombstone and deathbed expenses
• the costs of winding up the estate, including the executor's fee and the Master's fee
• everything that passes to the surviving spouse, whether under the will, under the Intestate Succession Act 81 of 1987, or under a claim for maintenance
• bequests to approved public benefit organisations
• an accrual claim the surviving spouse has against the estate under the marriage regime

The spousal deduction is usually the big one. It is often called the section 4(q) deduction after the part of the Act that creates it. Because it is unlimited, a person who leaves their whole estate to a spouse pays no estate duty, regardless of the estate's size. The tax is simply postponed until the second spouse dies.

What is left is the net value of the estate.

Step 3: Subtract the abatement

Every estate is entitled to an abatement of R3.5 million. This is a tax-free portion. You subtract it from the net value and only what remains is taxed.

If a person leaves everything to their spouse, they have no use for the abatement, because the spousal deduction already reduces the net value to zero. In that case the unused abatement rolls over to the surviving spouse's estate. When the second spouse dies, their executor can claim their own R3.5 million plus whatever the first spouse did not use, up to R7 million in total. Where the first spouse used only part of the abatement, only the unused part rolls over.

In practice the second executor must show how much of the abatement the first estate used, so keep the first estate's SARS assessment and final account safe.

Step 4: Apply the rate

The amount left after the abatement is the dutiable amount. The duty is 20% of the dutiable amount up to R30 million, and 25% of anything above R30 million.

A worked example: Thabo's R6 million estate

The figures are illustrative only and are rounded to keep the arithmetic clear.

Thabo dies leaving an estate worth R6 000 000 after his debts, funeral costs and the costs of administration have been paid. His will leaves R2 000 000 to his wife, Lerato, and the balance to his two adult children.

1. Net value before the spousal deduction: R6 000 000.
2. Less the amount left to Lerato: R6 000 000 minus R2 000 000 gives R4 000 000.
3. Less the abatement: R4 000 000 minus R3 500 000 gives a dutiable amount of R500 000.
4. Apply the rate: 20% of R500 000 is R100 000.

The executor pays R100 000 to SARS before distributing the remaining R3 900 000 to the children. Because the whole abatement was used, nothing rolls over to Lerato's estate. When she dies she will have her own R3.5 million abatement only.

Now change one number. Suppose Thabo had left R3 000 000 to Lerato instead:

1. R6 000 000 minus R3 000 000 gives R3 000 000.
2. R3 000 000 is less than the R3 500 000 abatement, so the dutiable amount is zero.
3. No duty is payable, and the unused R500 000 of abatement rolls over. Lerato's estate will one day have an abatement of R4 000 000.

Same estate, a different split, and a R100 000 difference in tax. Whether to defer the tax or use the abatement now is a planning choice, and neither answer suits every family.

Who actually bears the tax

The duty is normally paid out of the residue of the estate, the part left after specific gifts. Where a life policy pays straight to a beneficiary, the Act allows the executor to recover that beneficiary's share of the duty from them. A will can also say who carries the tax. If it is silent, the residue carries it, which can leave the residual heir with far less than they expected.

What to do this week

If you are planning your own estate:

1. List your assets and debts with rough values, and note which life policies pay to your estate and which pay to a named beneficiary.
2. Run the figures through our executor fee and estate duty calculator, which uses the current rates and abatement.
3. Check the beneficiary nominations on your policies and retirement funds. A nomination overrides the will for that asset.

If you are dealing with someone else's estate:

1. Report the estate to the Master if that has not been done. Read how to report a deceased estate to the Master.
2. Find the first spouse's final account if the deceased was widowed, because the rollover depends on it.

Documents to gather

The executor will need the death certificate, the original will, title deeds and bond statements, bank and investment statements at the date of death, the policy documents and the insurer's confirmation of who is paid, vehicle registration papers, valuations of shares and any business interest, the funeral account, the last income tax return and SARS reference number, and, for a widowed person, the previous spouse's estate duty assessment.

SARS can challenge a valuation it thinks is low, so a sworn valuation of a property or a business is worth paying for where the estate is near the abatement.

Realistic timeline

Estate duty is not paid in the first month. The executor can only calculate it once every asset has been valued and every debt confirmed, usually several months in. The return goes to SARS with the liquidation and distribution account, SARS issues an assessment, and the executor pays before the final distribution. The process runs alongside the winding up described in how long it takes to wind up a deceased estate. Where SARS queries valuations, add months.

SARS charges interest on duty paid late, measured from a date fixed by reference to the death, so some executors pay an estimated amount early and settle the difference on assessment.

Common mistakes and what they cost

• Forgetting a life policy. A R2 million policy paid directly to a child is still deemed property. Leaving it out can push the estate over the abatement, and the mistake surfaces when SARS assesses.
• Assuming the estate is too small to worry about. A paid-off house in a city and a couple of policies can pass R3.5 million faster than people expect.
• Losing the first spouse's records. Without them the executor may struggle to prove the rollover, which can cost up to 20% of R3.5 million, or R700 000, in avoidable tax.
• Distributing before SARS is paid. The executor can be held personally liable for the shortfall.
• Not saying in the will who carries the tax. The residual heir, often the child who gets the least, ends up paying for everyone.

If you cannot afford an attorney

Estate duty is worked out by the executor, not by a lawyer, and the Master's office deals directly with members of the public. In a small estate the Master may issue letters of authority under section 18(3) of the Administration of Estates Act instead of appointing a full executor, and estates that size very rarely attract estate duty at all. Where the estate is larger, the Master often requires the executor to appoint an agent, such as an attorney or accountant, and the fee for that comes out of the estate rather than your pocket. See what wills and estates work costs. Legal Aid South Africa on 0800 110 110 applies a means test and can help with some estate matters, and several university law clinics assist with estates. See our legal aid page.

Frequently asked questions

People ask whether estate duty and capital gains tax are the same thing. They are not. Death is treated as a disposal of assets for capital gains tax, which is charged in the deceased's final income tax return, and estate duty is then charged separately on the estate. Both are deducted before heirs are paid, though the primary residence and assets passing to a spouse enjoy relief under both.

People also ask whether giving assets away during life avoids estate duty. It reduces the estate, but donations tax applies to gifts above an annual exemption, so the saving is not automatic. Get advice before moving assets around for tax reasons alone.