Estate duty in SA: the R3.5m abatement, the 20%/25% bands, and common myths

Estate duty is governed by the Estate Duty Act 45 of 1955. It is levied on the dutiable amount of the estate of every person who dies ordinarily resident in South Africa, calculated on worldwide assets.

Every estate gets a Section 4A abatement of R3.5 million, deductible from the dutiable amount before duty is calculated.

On the first R30 million of dutiable estate above the abatement, duty is 20%. Above R30 million, duty is 25%.

The dutiable estate starts with the gross value of all property and 'deemed property'. Deemed property includes the proceeds of life policies on the life of the deceased (with carve-outs for buy-and-sell and key-person policies under Section 3(3)(a)(iA)), and the net value of donations made within seven years of death.

From that, deductions under Section 4 are taken - funeral costs, debts, administration costs, the value of any bequest to a Public Benefit Organisation, and the Section 4(q) spousal deduction (which generally allows the entire estate to pass to a surviving spouse free of estate duty).

The Section 4A abatement (R3.5m) is then deducted, and what remains is taxed at 20% / 25%.

When the first spouse dies and leaves the estate to the surviving spouse, the spousal deduction means no estate duty is paid. Crucially, the unused R3.5m abatement is preserved.

When the second spouse dies, they get their own R3.5m abatement plus the unused portion of the first spouse's abatement - a combined R7m before estate duty starts.

This only works if the first-dying spouse's estate uses the spousal deduction and does not use the abatement. The will should be drafted with this in mind.

Myth: 'Anything in a trust escapes estate duty.' Reality: assets in an inter vivos trust are outside the founder's estate, but loan accounts owed by the trust to the founder are inside the founder's estate. Section 7C effectively neutralises low-interest loans.

Myth: 'Retirement fund payouts are subject to estate duty.' Reality: amounts paid out from a pension, provident or RA fund under Section 37C are not deemed property and are not subject to estate duty.

Myth: 'My CGT and estate duty cancel out.' Reality: they are separate. CGT applies to the deemed disposal at death (with a R300,000 exclusion), and is paid by the estate. Estate duty applies to the dutiable amount and is also paid by the estate.