Loading...
General FinanceWealth

How to reduce estate duty in South Africa

Estate duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and a rate of 25% on the dutiable value of the estate above R30 million. Paying taxes is something that a lot of us don’t like doing, moreover paying it on inheritance. This is a guide on how to reduce estate duty in South Africa.

When a person dies, their assets form part of an estate, this estate will be received by nominated beneficiaries. This amount is taxed in what is known as estate duty, around R3.5 million is exempt. Meaning that your beneficiaries will not pay tax on the first R3.5 million. Tax will be paid on the remaining amount, which is currently 20% on anything above R3.5 million.

Your beneficiaries will pay R1 million in tax if your estate is deemed to be worth R5 million. This is a lot of money, considering that there are countries that don’t take estate duty at all. Here are some ways to reduce your estate duty in South Africa.

1. Retirement annuities

A retirement annuity is a tax effective investment asset that allows you to save up money for retirement. The amount of money you put in a retirement annuity is off hands to everyone, not even yourself or creditors. You can only access it at age 55. An RA is a good way to reduce estate duty because your beneficiaries will receive the money without paying any tax should you pass on.

2. Donations

A lot of millionaires and wealth people use donations as a way to reduce their estate duty. You can make donations of up to R100 000 annually without paying tax in South Africa. Donations can be made directly to your heirs or the people that you will leave your estate to.

It’s even better if you have a spouse, you can both make donations of R200 000 to your children annually. This is something that you should start as soon as you start thinking about reducing your estate. You can save between R400 000 and R600 000 in taxes if you do it in a period of 10 – 15 years. Donations that are over R100 000 will attract a flat tax rate of 20%.

3. Life insurance

You probably have life insurance already. A nominated recipient of the lump sum from your life insurance policy doesn’t have to pay tax. However, your life insurance will be counted as part of your estate should you not nominate a recipient. This will increase the overall value of your estate and more will be paid in taxes and administration fees.

4. Family only private company

Private companies pay a tax rate of 28%, this sounds counter intuitive. Why would you move your assets into a company if your beneficiaries are going to end up paying more tax?

The difference between companies and ordinary citizens is that companies only pay tax on profits and not income. This is why some billion-dollar companies manage to pay R0 in taxes. You can open a private company and give each of your beneficiaries’ ownership of the company. You will be able to move your assets into the name of the business.

Your children can continue using these assets, they can sell some of them and use the money to fund other things and grow it. They just have to make sure that they spend the profit made buying other assets before the end of the financial year. The major downside to this is that you won’t have a lot of control on how the business runs. We recommend setting up a property business. A property business is unlikely to fail. The assets you donate to the business will be sold and the money used to buy more property, all before the financial year end.

5. Spend the money

You can reduce the money by spending it on your heirs, buy a house for them and help them navigate other areas of life. Pay for the education of your grand children and use the money to improve the quality of life for your family.

Leave a Reply

Your email address will not be published.