R7m estate duty tax saving

SARS extends the benefit.

The Taxation Laws Amendment Bill tabled in Parliament on September 2 has some good news for estate duty as well as the reintroduction of a concession when transferring a residence from a trust or company to a natural person.

Pleasing changes include: “”portable spousal deduction”” which allows a first-dying spouse to enjoy a total cumulative tax deduction of up to R7m for estate duty purposes, and the “”usufructuary estate planning scheme”” which has come under scrutiny by the authorities for potential estate duty avoidance. Both amendments are effective for any estate of a person who dies on or after January 1 2010.

The final bill reflects that the R7m rollover tax deduction will now apply in all cases where a surviving spouse inherits from a pre-deceased spouse. The effective date will be in respect of the estate of the second deceased spouse, not that of the predeceased spouse.

The draft bill initially proposed that the deduction would only be available if the surviving spouse inherited the entire estate of the first dying. In that form the provision was of little use and could even lead to bad planning in an effort to make use of it. This is because very few people have simple estates with assets solely transferred to the spouse. Also, in the draft bill, the effective date for the cumulative tax deduction was in respect of the estate of the first deceased spouse which Fiduciary Institute of SA (FISA) believes would have prejudiced a person who might not have used an estate planner in the past.

FISA furthermore described as “”sensible and generous”” the concession made in the Act regarding polygamous marriages, to the effect that if the deceased was a spouse in a polygamous marriage, the tax deduction will be made available to all the spouses in that marriage on a proportional basis.

A more technical amendment proposed in the draft bill related to the “”usufructuary estate planning scheme.”” According to the national treasurys response document following parliamentary hearings on the bill, “”The envisaged aim of the proposal is to close down a scheme whereby testators avoid estate duty by bequeathing a usufruct to a spouse with the remainder first to a one-year trust (or other one-year holder), followed by another shift to the ultimate heir. However, this proposal unfairly penalises all usufructs, many of which have valid non-tax estate planning purposes. For example, a usufruct may be created in favour of a surviving spouse and then transferred to a minor child until such time as the minor reaches majority. … It is accepted that a usufruct created in a will can fulfill an important function in estate planning unrelated to the estate duty. In acceptance of this concern, the amendment is withdrawn for reconsideration. Nevertheless, the one-year schemes remain of concern and still warrant an appropriate remedy.””

While FISA acknowledged treasurys concern, it welcomed the withdrawal of the proposed measure as it would have the effect of penalising bequests of usufructs that have been made in order to achieve legitimate and non-fiscal aims.

A further concession is the tax-free transfer of a primary residence from a trust or company to the beneficiary or shareholder and/or his or her spouse. Where a primary residence is held in a company or trust and certain requirements are fulfilled, the property may be transferred without incurring transfer duty, secondary tax on companies and capital gains tax. This concession takes effect on February 11 2009 and ends on December 31 2010.

TAXtalk: www.taxtalk.co.za.

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