Do we really need estate duty?

While it is unlikely that the current ANC government will have the political will to abolish estate duty as levied under the Estate Duty Act, 45 of 1955, it does not detract from the fact that – as a source of revenue for the fiscus – it has become completely obsolete. The revenue estimate for the 2010 fiscal year for estate duty and donations tax together is less than R1 billion out of expected revenue of around R600bn. In fact, at the moment estate duty probably does more harm than good to the country, writes Louis van Vuren, head of Personal Fiduciary Services at BoE Trust Ltd.

Estate duty is, in essence, a capital transfer tax that is levied once on any person’s estate, if at all. In short, at the time of administering a deceased person’s estate, a return is submitted listing all property and deemed property (a technical term that need not be explained here), from which is deducted all liabilities and other allowable deductions to arrive at a net estate value. From this is then deducted a standard abatement (currently R3.5 million) to arrive at a dutiable estate, which is then taxed at 20%.

One of the allowable deductions is for all assets that accrue to the surviving spouse (including a life partner). The combination of this and the standard abatement means that virtually any estate with a value under R7m can be distributed in such a way that no estate duty will be payable in either the first dying or the surviving spouse’s estate.

Since last year, the R3.5m is also “portable”, which means that a testator can leave the entire estate to the surviving spouse, who will then enjoy a standard abatement of R7m (2 x R3.5m) in his/her estate.

Add to this the fact that most of the real wealth in the country is to be found outside the estates of the individuals in all sorts of structures (e.g. family trusts), and it is no wonder that estate duty is contributing very little to the fiscus.

Another reality is that the further away from 1 October 2001 we go, the more effective capital gains tax (CGT) becomes as a form of capital transfer tax.

Every time a capital gains event occurs, this tax is payable. Death, as an event, also attracts CGT, although there is some relief with rollover provisions for bequests to the surviving spouse.

The only way to avoid CGT legally is to keep all your wealth in cash investments, as cash is exempt from CGT. Even if you never sell an asset, it will attract CGT at your death (provided it is not bequeathed to a surviving spouse). No one with real wealth and in his right mind would keep all investments in cash, as it is a sure way to lose wealth over time.

Because of structures such as trusts, some of which were set up purely to avoid estate duty, assets may stay in such structures for generations without ever triggering CGT. Had it been possible to transfer these assets freely without estate duty, less of these structures would have existed.  This in turn would probably have led to more regular transfer of these assets, which would have caused more CGT events, with a resulting increase in income from CGT for the fiscus.

Because (at least some) structures were set up purely to avoid estate duty, this has added a level of complexity to estate planning, the relevant legislation as well as the administration of deceased estates that a developing country can well do without.

The Estate Duty Act is quite a complex piece of legislation. The entire process ties up very creative minds that could have been applied to create real new wealth. The real cost to the economy of compliance with this complex legislation is anybody’s guess. For what, is the question. For a mere R700m per annum.

Is it really worth it?