Estate Duty: How It Is Calculated — and How Planning Reduces It

Estate duty is the tax most families only learn about at the worst possible time. It is levied under the Estate Duty Act 45 of 1955 on the estate of every person who dies owning South African assets — and because it is calculated on the estate rather than on the heirs, decisions made years earlier determine what is left to distribute.

The calculation, step by step

The starting point is the gross estate: everything the deceased owned, plus deemed property — assets the Act pulls back into the estate even though they pass outside the will. The most important category of deemed property is proceeds of domestic life insurance policies on the deceased’s life, subject to limited exceptions such as properly structured buy-and-sell policies between business partners.

From the gross estate, the Act allows deductions under section 4: debts, funeral and administration costs, bequests to public benefit organisations and — most significantly — everything that accrues to a surviving spouse under section 4(q). What remains is the net estate. Each estate then deducts the section 4A abatement of R3.5 million. The balance is the dutiable estate, taxed at 20% up to R30 million and 25% on everything above.

The spousal rollover — and its trap

Because the section 4(q) deduction is unlimited, an estate that leaves everything to a surviving spouse usually pays no estate duty at all. Better still, the unused abatement rolls over: the second-dying spouse’s estate can claim up to R7 million. But the deduction defers duty; it does not eliminate it. Everything inherited by the survivor is taxed in the survivor’s estate later, by which time the assets have usually grown. “Leave it all to my spouse” is a default, not a plan.

Where the planning happens

Legitimate estate duty planning works on three fronts. First, structure of the will: using the abatement of the first-dying spouse rather than wasting it, directing growth assets to the next generation or a trust, and sequencing bequests so that section 4 deductions do their work. Second, lifetime structuring: assets transferred to a properly administered trust no longer grow in the founder’s estate — though donations tax at 20%, transfer costs and the attribution rules mean this is a calculation, not a reflex. Third, liquidity: matching expected duty with cash or policy proceeds so the executor is never forced to sell the farm, the practice or the family home to pay SARS.

“Most estate duty problems we see are not tax problems. They are liquidity problems that were visible ten years earlier.”

Deemed property surprises

Families are most often caught by assets they never thought of as part of the estate: life policies payable to the estate or to heirs, accrual claims between spouses, and offshore assets of a South African resident, which remain fully within the net. Conversely, certain foreign assets acquired before a deceased immigrated, and policy structures that meet the statutory exceptions, fall outside — the detail decides everything.

Who pays, and when

The executor pays estate duty out of the estate, generally within a year of death, with interest running thereafter. Where a policy pays directly to a beneficiary, that beneficiary can be liable for a proportionate share of the duty — another surprise better discovered in planning than in administration.

An estate duty calculation done during your lifetime costs a fraction of what an unplanned estate pays later. We prepare the calculation, stress-test the liquidity, and draft the will that carries the plan into effect.

This article is part of our Estates & Trusts practice. If you are dealing with this situation, speak to one of our directors directly.

Disclaimer: This article is general information, not legal advice. The law is stated as at the date of first publication and may since have changed. Reading it does not create an attorney–client relationship. For advice on your specific circumstances, speak to one of our directors. See our full disclaimer.