Capital Gains Tax

Author : Millers Attorneys

The introduction of Capital Gains Tax in the Income Tax Act as from 1 October 2001 will have a significant effect on the estates of all persons dying after that date.  The event of death will trigger the capital gains tax and this can cause cash deficiencies in deceased estates.  Although an annual exclusion of R 50 000,00 will apply where a person dies during the year of assessment, this amount may prove to be insufficient to prevent a cash shortfall in the estate.  In estates with a value in the vicinity of R 1 million, relief with the reduction of estate duty from 25 % to 20 % on the estates of persons dying after 1 October 2001, will also not assist to prevent the cash shortfall.  (The donations tax rate has also been reduced from 25 % to 20 % and shall apply in respect of donations in excess of R 25 000,00 per annum per donor also only taking effect on/or after 1 October 2001).

As is the case with all new tax laws being introduced, now again with the introduction of Capital Gains Tax, some important tax and estate planning opportunities become available. Capital gains tax planning now forms a critical part of any commercial and estate planning.

While life insurance has been an important and useful cash creator in estates, it will in future have the added value that the proceeds of life policies (endowment and whole life) will be excluded from capital gains tax provided it does not qualify as a second hand policy i.e. a policy that is purchased by or ceded to another person from the original owner.

The second hand policy disqualification does however not apply where the policy:

  • Was donated and ceded to a spouse;
  • Was ceded to a former spouse in consequence of a divorce order;
  • Is a keyman policy;
  • Co-shareholders or partnership policy;
  • Was originally taken out in consequence of a person`s membership of pension, provident or retirement annuity fund.

Although the life insurance policies, which thus qualify, can be excluded from capital gains tax, one has to remember that the policy may still attract estate duty in the estate of the deceased. This is an aspect that will be dealt with in later articles.

* rates and percentages mentioned, are subject to change…