Death And Capital Gains Taxes In 2011

So when it comes to financial planning, what on earth does capital gains tax have to do with dying?
Well, as it turns out…quite a bit unfortunately!
You see before we can get around to winding up the estate and dishing out assets left right and centre, we need to wind up the deceased’s income tax return. Capital gains tax – or CGT – forms part of that income tax return.

But what does capital gains tax (CGT) have to do with someone passing away. They never sold anything after they died?” I hear you say.
In previous articles we discussed ‘disposals’ and ‘Deemed disposals’. Let’s look at the definition of a deemed disposal:
A deemed disposal is when a person is “deemed” to have disposed of an asset for proceeds equal to the market value of that asset at the time of the event.
Examples of deemed disposals are:

  • The death of a person.
  • When a person ceases to be a South African resident i.e. when a person emigrates to another country.
  • When a person becomes a South African resident.

Basically, somebody who has passed away is deemed to have disposed of his assets on the day immediately prior to death. However, there are exceptions to the “deemed disposal” rule.

1.       Any assets which are left to a surviving spouse or transferred to the spouse at the base cost.

So, for example, if the deceased had purchased a house for R500, 000 five years ago and the house is currently worth R1 million at market value, then the house is transferred into the surviving spouse’s name at R500, 000.

2.       Assets left to a public benefit organisation

These are also excluded from the capital gains tax calculation. One condition is that the public benefit organisation must be approved by the commissioner.

3.       Pension, Provident or retirement annuity funds.

The proceeds from any of these funds is also excluded.

In other words, if the main residence is left to the surviving spouse, there is no capital gains tax implication. If the holiday home however, is left to a child, then there is a capital gains tax implication. Personal use assets, such as furniture and motor vehicles are also not included in the capital gains tax calculation.

Now you might recall that previously we discussed the R20, 000 annual exclusion applicable to the capital gains tax calculation in 2011?
In the instance where someone has died, this annual exclusion was increased to R200, 000.

Furthermore, if the deceased was over the age of 55 at the time of death, and owned a share – for at least five years – in a small business (a small business is defined as one where the market value of its assets doesn’t exceed R5 million), then R900, 000 of any capital gain was excluded. To qualify for this exemption, the assets of the business must be ‘active’ business assets. Owning a R5 million cash investment at a bank in the name of the business won’t qualify as an active business asset.

Next week will run through an actual example.

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Until next time.

The InsuranceFundi Team

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