Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

I have had several questions like this over the past few weeks. As with most of the questions I get, it is extremely difficult to give you a firm answer without knowing your full financial situation. What I will do is go through some of the key issues that you need to think about before making a call.

The property can be transferred to your children on your death or you can donate it to them now. There are different cost implications depending on what you do. I will go through the main cost implications below. (I have had a few requests to show the calculations, so skim over them if they are not your thing.)

There are three major costs that you have to watch out for:

• Capital gains tax
• Estate duty/donations tax
• Executor fees

Capital gains tax

Should you die today, the capital gains tax would be calculated as follows:

Value of house: R5,000,000

Less purchase price: R2,000,000

Less improvements: R500,000

Gross capital gain: R2,500,000

Less primary residence exclusion: R2,000,000

Less annual exclusion in year of death: R300,000

Net capital gain: R200,000

Inclusion rate: 40%

Assumed marginal tax rate of 31%: 31%

Capital gains tax payable: R24,800

If you donated the property to your children today, the capital gains tax would be R57,040. The capital gains tax on donation will be higher because the annual exclusion is only R40,000 and not the higher R300,000 that is allowed in your year of death.

Estate duty/donations tax

If you donate an asset, you will pay a donations tax of 20%, which is the same as the estate duty rate for most people.

Even though the rate is the same, there are a few allowances that can have a massive impact on the result.

Each person receives a section 4A abatement of R3.5-million on their estate duty. If the property is your only real asset, your estate duty would be in the region of R253,390.

Assets: R5,000,000

Less    

Executor fees: R201,250

Master’s fees: R7,000

Capital gains tax: R24,800

Total: R233,050

Dutiable estate: R4,766,950

Less section 4A abatement: R3,500,000

Dutiable amount: R1,266,950

Estate duty @ 20%: R253,390

If you donated the house, the donations tax would be calculated as follows:

Value of donation = R5,000,000 – R100,000 (annual donation exemption) = R4,900,000

Donations tax = R4,900,000 x 20% = R980,000

Executor fees

Executor fees of 4.025% of R5-million would be payable should your children inherit because of your will. This would equal R201,250.

No executor fees are paid when you donate a property while living.

Summary

So, to summarise, we have:

Inherit on death / Inherit now via donation

Capital gains tax: R24,800 / R57,040

Estate duty: R253,390 / R0

Donations tax: R0 / R980,000

Executor fees: R201,250 / R0

Total: R479,440 / R1,037,040

In this instance, inheriting via the will makes more financial sense. If, however, you have other assets worth more than R3.5-million and your section 4A abatement is used up, you get a very different answer. Your estate duty will increase to R953,390.

The comparison will look as follows:

 Inherit on death / Inherit now via donation

Capital gains tax: R24,800 / R57,040

Estate duty: R953,390 / R0

Donations tax: R0 / R980,000

Executor fees: R201,250 / R0

Total: R1,179,440 / R1,037,040

The donation would make sense in this instance.

Should you donate the property, the growth in the value of that property will be enjoyed by your children. You will not pay any additional estate duty or donations tax on this growth from the time of donation.

Remember, when you donate an asset you are giving up control and you must be comfortable that this will not have a significant impact on your finances or quality of life.

These are big decisions, and you should get a specialist to help you make the right one.