Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors

I am an SFP affiliated Financial Advisor

No. 043 – The formula for calculating capital gains tax

by | Nov 19, 2024 | Investment

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

In order to calculate capital gains tax (CGT), we must know these three things:

  •   The capital gain.
  •   The inclusion rate. (I will explain this.)
  •   The tax rate.

The formula for calculating CGT is as follows: CGT = capital gain after the deduction of any exclusions x inclusion rate x your marginal tax rate.We need to know what exclusions will apply, what the inclusion rate is and what the marginal tax rate is.

Exclusions

If this is your primary residence, then the first R2-million of the capital gain will be excluded from the calculation. If it is your holiday home or one that you use for rental income, then the full profit will be taxable.I will assume that this is your primary residence, so only R1.5-million of the R3.5-million gain will be taxable.

Inclusion rate

Not all the gain is taxable. If you are an individual, only 40% will be taxed. If the property is owned by a company or trust, then 80% of the gain will be taxed.

Marginal rate of tax

Your income tax is levied on a sliding scale. The more you earn, the higher your tax will be. The marginal tax rate is the rate of tax charged on the last rand you earn – it is the highest tax rate that you pay.The CGT formula is as follows: capital gain x 40% inclusion rate x your marginal tax rate.You would therefore pay: R1,500,000 x 40% x 36% = R216,000.

Insider tip

If you sell a big asset like a house, try to reduce your marginal tax rate. There are a few ways of doing this:If you live off the proceeds of a business, reduce your drawdowns for the tax year and live off some of the profit from the sale of your house. In the example above, if you reduced your marginal tax rate to 18%, then your CGT would halve to R108,000.If you are on a fixed income or pension, then invest in a retirement annuity (RA) in order to drop to a lower tax bracket.For example, if you earned R500,000 a year, your marginal tax rate would be 36%. You are allowed to contribute up to 27.5% of your income to an RA. This would equal R137,500 and would reduce your taxable income to R362,500. The marginal tax rate for R362,500 would be 31%.If you applied the new marginal tax rate to the CGT formula, you would have: R1,500,000 x 40% x 31% = R186,000, which saves you R30,000.

Question:My parents do not have any assets besides their home. They have bequeathed their home worth R1-million to me. What estate duty and transfer costs will I be liable for?

Answer:There is something called a section 4A abatement that will give each of your parents a R3,500,000 buffer on their assets before estate duty is charged. If the estate is worth less than R7-million, then there would be no estate duty payable on the house.There are two other costs that you must look out for when someone dies: CGT and executor fees.These often take us by surprise, as we tend to focus only on estate duty. I come across many estates where there has been no planning for these costs and then assets have to be sold in order to cover them.In your instance, there would be no CGT payable, as it is a primary residence and the gain is below R2-million.The executor fees, however, would be 4.025% x R1,000,000 = R40,250.

Transfer costs

There is no transfer duty payable when you inherit. However, the property will have to be transferred into your name. This will incur conveyancing fees of about R20,000. 

KENNY MEIRING IS AN INDEPENDENT FINANCIAL ADVISER

Contact him via phone, email or via contact phone on the financialwellnesscoach.co.za website

Read more of our articles on the Daily Maverick website or newspaper weekly!

May 04 2026

No. 252 – A late-life divorce settlement must still work after the dust settles

Question My husband and I are divorcing after a long marriage.   I took time out of the workforce to raise our now adult children, so my retirement savings are much...
May 03 2026

No. 251 – Paying off credit card debt with a bond only works with discipline

Question I built up R80,000 of credit card debt during a difficult period. Things are now more stable, but the debt is expensive at 20.6%. I also have available credit...
May 03 2026

No. 250 – How to prepare your investment portfolio for retirement income

Question I will be retiring in three years. Should I be moving my money into the money market fund?Answer As retirement approaches, it is important to reassess your...
May 03 2026

No. 249 – How to manage retirement income in a falling investment market

Question I will be retiring at the end of June and I am horrified by what has happened to my retirement funds. They have dropped significantly since the beginning of...
Mar 29 2026

No. 248 – Savvy divorce planning starts with seeing whole financial picture

Question I am getting divorced. Everyone talks about the house, the pension and maintenance, but I do not even know where to begin. From a financial planning...
Mar 29 2026

No. 247 – Balancing care, finances and dignity for a parent with dementia

Question My mother is a widow and has been diagnosed with early-onset dementia. She owns several rental properties that provide her with income. She now needs to move...
Mar 29 2026

No. 246 – The case for not making hasty decisions in times of uncertainty

Question I am really worried about what is happening in Iran.  Should I move my investments into gold or the money market until things settle down?Answer The current...
Mar 29 2026

No. 245 – Think twice before establishing a trust to fund future education

Question I’d like to set up a trust for my five-year-old daughter’s education. Is that the right move?Answer A trust can be an excellent vehicle for providing for your...
Mar 02 2026

No. 244 – How modern endowment policies can make tax and estate sense

Question My financial adviser recommended that I invest in an endowment. Is this advisable? I’ve heard bad things about it.Answer For many South Africans, endowments...
Mar 02 2026

No. 243 – The right questions you should be asking about a living annuity

Question I will be retiring shortly and am looking at buying a living annuity.  I was told that the main item to look at would be costs.  The plan that I am looking at...

Download the Life File