Estate Planning and your Property Investment

What is Estate Planning?
In the event of your death, Estate Planning ensures that your dependants are taken care of financially and that your beneficiaries receive the maximum benefit from your estate. It also ensures that your tax liabilities are minimised through the permitted tax exemptions available to you, and that the value of your hard earned assets is not eroded by tax.

What is Estate Duty?
Estate Duty is a government tax, which is payable at death, on your Net Assets. Estate Duty is currently levied at a flat rate of 20% on all property of residents and South African property of non-residents. A basic deduction of R 3,5 million is allowed in the determination of an estate’s liability for Estate Duty as well as deductions for liabilities, bequests to public benefit organisations (PBOs) and property accruing to surviving spouses.

What is meant by Net Assets?

What you Own

Less: What you owe, what you donate to PBOs and property accruing to a surviving spouse
Less: The allowed abatement of R 3 500 000.00

Equals: Your Net Assets

What is CGT?
Capital Gains Tax (CGT) is a government tax levied on any capital gains which is made on the sale (or disposal) of an asset. Capital gain is calculated by deducting the Base Cost of the asset from the market value on the date of sale. Liabilities such as an outstanding bond amount do not reduce the capital gain.

What is meant by Base Cost?
The market value of a property, as per the valuation on 1 October 2001 or if bought after that, the purchase price plus certain allowable expenditures is the Base Cost.

How is CGT calculated?
Currently, individuals pay CGT on 25% of the gain, which is taxable at their marginal income tax rate i.e. if your marginal tax rate is 40%, you will have to pay 10% CGT on the gain?

What are the exclusions?
There are certain exclusions when calculating CGT:

• personal use items;
• R1,5 million gain/loss on the disposal of a primary residence or the disposal of a primary residence for an amount of R2 million or less;
• at death a bequest to a spouse is subject to roll over relief and taxable only on the subsequent disposal by the spouse;
• there is an annual exclusion of R17 500.00 which becomes R 120 000.00 in the year of death.

Given the huge growth in property values over the last couple of years, these exemptions, although they seem substantial, may not be large enough to cover your property portfolio’s growth. It is also important to take into consideration that the R1,5 million primary residence exclusion cannot be used for properties bought for investment purposes. It is only applicable to the property you call ‘home’, i.e. the one in which you reside permanently.

Utilising the roll-over that is available between spouses at death is not a way to avoid paying CGT. CGT will have to be paid at a later stage when the receiving spouse disposes of the assets. The base cost will also be the base cost of the first dying spouse and not the value at which the survivor received it.

Why Worry About Estate Planning when Investing in Property?
You may have worked really hard at building a property portfolio (even if it is just one or two properties) with the intention that it grows in value substantially. But if you do not plan your finances correctly, and your family is short of money to pay taxes, duties and winding-up costs on your estate at the time of your death, they may have to sell the properties in your portfolio in order to raise the funds. This obviously defeats the object.

On your death your assets are automatically considered ‘disposed of’, whether they are sold or not. Your estate will need liquidity in order to carry the costs of taxes, duties and winding-up costs. All your debt will need to be settled before any remaining funds or assets can be distributed to your beneficiaries. If there is not enough liquidity in your estate, some of your fixed assets, like your home, may need to be sold at less than market value to cover all your debt.

No one plans to be a victim, but you must keep in mind that in today’s day and age, it is crucial that you protect your family and your assets against unexpected crisis that have financial consequences. Your death may be the result of an accident or a violent crime. You must review your estate plan at least once a year in order to make provision for your growing property portfolio, so that in the event of your death, your estate can cover the 20% Estate Duty and 10% Capital Gains Tax, where potentially payable.

Safeguard Your Property Investment.
Your estate plan must include sufficient liquidity, which will fund any outstanding debts, taxes, duties and winding-up costs incurred at the time of your death.

A financial adviser can assist you:

• to analyse your existing financial situation and your portfolio of assets;
• to prioritise your financial planning needs;
• to safeguard your investments and your family’s assets by suggesting some affordable solutions in terms of financial planning products;
• to calculate the Estate Duty and Capital Gains Tax that would be payable on your death;
• in referring you to an appropriate tax adviser in order to maximise the use of the various exemptions from Estate Duty and Capital Gains Tax, which can lower the tax payable in may estates.

Professional advice is necessary regardless of the size of your estate. One persons estate will vary from another’s in terms of complexity, i.e. a will might suffice for some, while for others different structures and vehicles like trusts are required to minimise their tax liabilities.

An example of how you can safeguard your property investment is to take out life and disability coverage which will take care of your liquidity needs during the winding-up of your estate, whereby a lump sum payment could be made on your death or disablement that can be used to pay all outstanding liabilities or provide income for dependants. Life cover is still one of the most affordable options available to estate planners to ensure that there is enough liquidity in their estate and to maximise their legacy to dependants.

NB! Remember to let your loved ones know where to find all the relevant documentation to speed up the process of winding-up your estate.

We strongly recommend that you seek professional assistance when drawing up an Estate Plan.

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