Death And Capital Gains Tax In 2012

Last week we looked at the capital gains tax calculation where Paul passed away in 2011.
Today we’re looking at the exact same situation but from a 2012 financial planning perspective. Was Paul better off in 2011 than 2012? Let’s find out…

Remember that this situation applies from March 2012 onwards:

Paul has two major assets in his estate. The one is the home that he and Jean, his wife, live in and which is valued at R3 million. This was bought five years ago for R1 million. The other asset is a holiday flat in Shelley beach worth R1,7 million, which was bought eight years ago for R900,000.
In terms of Paul’s will, he leaves the main residence to his wife, Jean. The holiday home in Shelley beach is left to his son, Michael.

The main residence

Market valueR3,0 million
Base costR1,0 million
Capital gainR2,0 million
Primary residence exclusionR2,0 million
Equals capital gainn/a

Remember from last week that this capital gain is completely excluded from the calculation since the home was being left to Jean, his spouse. Another difference this year is that the primary residence exclusion has increased from R1, 5 million to R2, 0 million.

The holiday flat in Shelley beach

Market valueR1, 7 million
Base costR    900,000
Capital gainR    800,000
Primary residence exclusionn/a
Capital GainR    800,000

Since the holiday flat is being left to Michael, the full capital gain of R800, 000 is included in the calculation. To remind you…If the flat had been left to Jean then no capital gains tax would have been payable.

Capital gainR800,000
Less annual exclusionR300,000
Equals aggregate capital gainR500,000

The annual exclusion upon death has been increased from R200,000 last year to R300,000 this year. This means that the aggregate capital gain for Paul drops from R600, 000 to R500,000.
While this is good news, the bad news is that the inclusion rate applicable to individuals and special trusts has increased from 25% to 33, 33%!
Multiplying the R500,000 gain by the inclusion rate of 33, 33% for individuals (R500,000 x 33, 33% = R166,650) gives us a taxable capital gain of R166,650.
This needs to be included in Paul’s income tax return for the 2012 tax year.

In the 2011 calculation, Paul had a R600,000 gain multiplied by 25% which meant a taxable capital gain of R150, 000. In 2012 Paul had a gain of R500, 000 multiplied by 33, 33% which resulted in a R165,650 taxable capital gain.

Basically, Paul would have been better off if he had died last year! Of course, this is not the whole story since SARS was kind enough to give us all some income tax relief.

Remember that we always recommend seeing a qualified financial planner when doing this calculation. It’s also important when taking out life insurance, that you make provision for any potential capital gains tax liability.

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