South Africa’s millionaire tax tips

Not even dollar millionaires are safe from scrutiny by the South African Revenue Service (SARS) upon death.

Richus Nel, a wealth adviser and principal at PSG Wealth, said that multi-millionaires would face SARS regarding capital gains, estate duty and executors that levy fees.

Nel said that estate duty, capital gains taxes, and executor’s fees can be reduced and sometimes completely avoided by intentional estate planning.

He added that there are various solutions that can reduce tax implications, ideally bringing taxable amounts within the exemption thresholds to avoid paying unnecessary taxes.

According to the wealth adviser, one strategy is to reduce your personal estate as much as possible by using separate legal structures and tax-friendly investment vehicles.

Nel said that it is important for people to do proper estate planning when:

• Their estate is above the current threshold of R3.5 million per spouse or,
• Their projected investments grow faster than their financial needs in real terms.

To best mitigate excessive tax, The group provided the following possible solutions:

Usufruct

“A registered usufruct gives a legal right to the usufruct holder for the use and enjoyment of someone else’s asset,” said Nel.

Retirement annuities and living annuities

A recommended estate planning strategy is investing a lump sum into a retirement annuity.

It benefits “lazy money” like cash and fixed interest assets, which earn interest exempted within the annuity.

These funds are also not subject to estate duty and executor’s fees if a beneficiary is designated. However, it’s important to focus on using capital for retirement purposes.

Donations

Nel says that donations may seem unattractive due to the immediate capital gains tax (CGT) and contributions tax implications of 20% (or 25% for amounts larger than R30m).

“Pre-death donations of liquid assets into a separate legal structure can make a lot of sense because no additional CGT or transfer taxes will be triggered. Further, donations tax will be paid on the current value instead of estate duty on increased future value. Attributions rules might apply to change the tax structure of, e.g. a trust, so seek professional advice.”

Buy fixed property in a company or trust

Buying investment property in a company or trust is wise, said Nel.

Providing mortgage security may be necessary if the entity lacks assets or income. He added that financing the premiums on behalf of the company/trust can be considered a donation, eligible for reduction using the donation exemption.

Estate pegging

“Estate pegging is a concept by which an individual reduces their dutiable estate value by moving assets, via a loan account, into a trust or company at the current value,” Nel said.

“With this, all future asset growth takes place outside their personal estate.”

When it comes to estate pegging, Nel said that the following two things must be considered:

• In the past, it was common practice to fund a company/trust with assets through an interest-free loan from the settlor. On 1 March 2017, SARS prescribed a “deemed interest rate” as an anti-avoidance provision. According to this provision, interest rates lower than the “official rate” will be regarded as a deemed donation and donations tax would be levied on that donation.

• Donations tax can be reduced by using the annual donations tax exemption. Remember that the outstanding loan amount will have to be settled (needs liquidity)/written off at the point of death. The lender’s will must be drafted correctly to avoid CGT on the loan written-off at death.

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