The Receiver of Revenue takes a much smaller slice of the money you inherit than you might fear.
Alan Steinberg, partner in charge of Ernst & Young's estates division, says the capital sum you inherit in a will is not taxed in your hands.
However, Inland Revenue may not be left entirely empty-handed.
Two types of taxation are relevant in a deceased estate estate duty and income tax. Estate duty is levied at a flat rate of 25 percent on the value of an estate above R1 million.
The exception is that no estate duty is payable between spouses, so if a husband dies, his wife inherits the whole estate without paying duty, and vice versa.
For example, if the value of the estate is R10 million, estate duty of 25 percent would be payable on R9 million, i.e. R2,25 million.
If the estate is only worth R800,000, no estate duty is payable. If you inherit an estate from your husband or wife worth R10 million, you get R10 million. But, a careful planner would ensure that efficient use is made of the rebate by leaving R1 million to the children or to a discretionary trust for the spouse and children.
Steinberg says the estate pays income tax on income earned unless there are determined heirs.
That means that in the period between the death and the distribution of the estate, income tax is payable at the rate applicable to individual taxpayers on any income earned by the estate, less expenses. The sort of income earned is made up of usually interest and rental. This only applies in the case where the bequests consist of various legacies R5 000 to the next door neighbour, R20 000 for the kittens, etc. It does not apply where there are determined heirs where the will says "the residue of the estate to be divided among my five children" or "the residue of the estate to my friend Gladys". In that case, the children, or Gladys, are determined heirs and pay the income tax at their own marginal rates of tax.
Take an example of an estate worth R10 million, to be divided among five children. In the six months that it took to wind it up it earned another R100 000 in income.
First the estate would pay the estate duty on R9 million, leaving R7,75 million. Assume the executors charged another two percent to administer, namely around R200000. The remaining R7,55 million would be divided five ways R1,51 million each. Then the R100000 earned in income, less any expenses, would be divided five ways. Assume it's close to R20 000 each, then each of the heirs would declare R20 000 as income earned during the year and pay his or her normal rates of tax on it.
However, the R1,51 million they actually inherited under the terms of the will would not be taxed.
But, in one way or another the taxman would take his cut in the following months. If you decided to buy a yacht with the full sum, you would pay VAT. If you put the money on deposit at the bank, you would pay income tax on any interest earned above R2 000 a year. If you bought a retirement annuity, the fund would pay tax at 17 percent and you would be taxed on the benefits when it matures.
Over the next few weeks we shall look at some of the spending and saving choices open to a beneficiary.