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Cape Town - The recent hikes in master’s fees, value-added tax, estate duty and donations tax rates have increased the cost of dying significantly in South Africa, said David Thompson, Senior Legal Adviser at Sanlam Trust.
In the 2018 budget speech former finance minister Malusi Gigaba announced the increase of VAT to 15% from 14% with effect from 1 April 2018.
"Most professional executors and trustees should be registered VAT vendors," said Thompson.
Executor’s fees are generally 3.5% plus VAT. At 15% this will equal 4.025% of gross assets. For an estate of R5 000 000 this represents an increase of R1 750. Effectively there will be an increase of R350 for every R1 000 000 of the gross estate.
According to Thompson an estate requires the provision of other services such as the conveyancing of fixed property, tax returns and financial statements by accountants, and sworn appraiser or valuation fees. Most of these will be affected by the VAT increase.
Also, fees due to the Master of the High Court by the deceased estate were increased on January 1 2018. Previously these fees could never be more than R600. This level was reached around the R200 000 gross assets mark.
In terms of the new regulations Master’s fees are capped at R7 000 – once the gross estate reaches R3 600 000. A new sliding scale applies – last changed in 1983, the new rates are a substantial increase.
Thompson said the administration of testamentary and inter vivos trusts is often carried out by professional trustees. The new VAT rate will also apply to their annual administration fee and other services.
The estate duty rate of 20% was increased to 25% for persons dying on or after March 1 2018 for the portion of the dutiable estate that exceeds R 30 000 000 only. So 20% will apply up to R30m (R6m) and 25% will apply for each rand above that.
Donations tax is 20%, but from March 1 2018 a donation (or donations) in excess of R30m in one tax year will attract tax at 25% on the value in excess of R30m. It is, therefore, still in line with estate duty.
Of most concern for Thompson is the mention in the budget review that the “official rate of interest” – currently equal to the "repo rate" plus 1% (7.5% p.a. as of 28/3/2018) – should be increased to the "prime rate of interest" charged by local banks, which is currently around 10% p.a.
Thompson said the official interest rate is used, among other things, to calculate the deemed donation brought about by section 7C of the Income Tax Act, on non-interest bearing or low-interest loans between ‘connected persons’ and trusts. This is a common estate planning tool that has proved to be very effective, he said.
Thompson pointed out that it is important to note that the need for liquidity does not end upon the winding-up of an estate.
"The trustees of the resultant testamentary trust also need money to pay the trust bills and this is often overlooked by clients. Only having fixed assets in a trust is not good enough to sustain the trust until, for example, all the beneficiaries have attained the age of majority or become entitled to the trust capital."
Thompson said the increase in estate duty and donations tax rates means that the use of trusts in estate planning becomes even more important in the view of experts in the field. With inflation running at about 5% p.a. assets can grow enormously in value over one’s lifetime.
"All of this means that the liquidity of an estate and trust – which is already a major problem for executors and trustees – requires more scrutiny. More money will be needed. Cash in the bank and life insurance paid to the estate and/or testamentary trust must be planned for by financial planners," Thompson concluded.
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