The South African estate duty exemption threshold has remained fixed at R3.5 million since March 2007. Because this figure has not been adjusted to account for inflation, an increasing number of average estates are now subject to estate duty. This economic reality is known as fiscal drag. 

In 2007, a net estate of R3.5 million represented a substantial accumulation of wealth. Today, following nearly two decades of inflationary pressure, the purchasing power of that threshold has significantly diminished.

Under the Estate Duty Act 45 of 1955, the primary abatement allows the first R3.5 million of an estate to be transferred free of estate duty. Any amount exceeding this threshold is taxed at a rate of 20%, escalating to 25% for the portion of estates above R30 million. Because the National Treasury has maintained this static threshold for 19 years, inflation effectively increases the tax base without any corresponding legislative changes.

The mechanics of fiscal drag

Fiscal drag arises when inflation increases the nominal value of assets, but statutory tax thresholds remain fixed. This can result in higher estate duty liability even if the owner’s real wealth has not increased. A property acquired over a decade ago may have doubled in nominal value. If the owner's real wealth or purchasing power has not actually increased in real terms, the estate is simply incurring higher tax liabilities on inflated asset values.

By retaining the current Section 4A abatement limit, the South African Revenue Service collects greater estate duty revenues over time. This shifts the burden of estate duty from higher net-worth individuals to a broader segment of the population.

The spousal abatement buffer

There is a statutory relief mechanism available to married individuals. Under Section 4q of the Estate Duty Act, the value of assets bequeathed to a surviving spouse is entirely exempt from estate duty. Additionally, the surviving spouse may utilise the deceased spouse's unused R3.5 million abatement at the death of the surviving spouse.

This provision creates a combined potential exemption of R7 million upon the death of the second spouse. However, for estates with significant property holdings or accumulated retirement savings, it is possible that the combined R7 million thresholds may be exceeded.

Strategic Estate Planning

Taxpayers must implement proactive measures to protect their accumulated wealth.

• The Income Tax Act 58 of 1962 permits individuals to donate up to R150,000 annually without incurring donations tax. Gradually transferring wealth during one's lifetime is a highly effective method for reducing the ultimate estate duty liability.
• Transferring growth assets into an inter vivos trust or trust-owned structures ensures that future capital appreciation occurs outside of the founder's personal estate. This strategy pegs the value of the asset within the personal estate at its transfer value, sheltering subsequent inflationary growth from estate duty.
• If an estate holds significant fixed assets but limited cash, the executor may be forced to liquidate property to settle the duty owed to the South African Revenue Service. Structuring life insurance policies appropriately can provide the necessary liquidity to discharge these obligations without compromising the core family assets.

While R3.5 million remains a meaningful exemption, the effects of inflation over time mean that estates may now face increased duty. Reviewing and updating your estate plan ensures heirs are adequately protected and minimises unintended tax exposure.

You are welcome to contact our Fiduciary & Estate Planning Team to review your global estate planning structure and ensure your assets are protected.

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