The tax implications of inheriting a property

Investing in property has always been a popular choice for those looking to build wealth and pass it on to future generations. With the real estate market experiencing steady growth over the long term, property investment can be a lucrative opportunity.

However, inheriting a property can come with many legal and financial complexities. If property forms part of your estate and you intend to pass it on to your loved ones, consider the potential tax implications. Make informed decisions now to avoid any unpleasant surprises for those who will inherit it after you pass away.


Estate duty

Estate duty is a tax levied on the reassignment of wealth from a deceased estate to beneficiaries. It applies to the entire estate, subject to certain deductions and exemptions. It is charged on the worldwide property and deemed property of an individual who is ordinarily a resident in South Africa, as well as on South African property owned by non-residents.

Estate duty is calculated after various deductions under section 4 of the Estate Duty Act, 45 of 1955, and applying an abatement of R3.5 million against the net value of the estate to establish the dutiable value. The tax rate for estate duty is set at 20% for the first R30 million and 25% for any value above R30 million.

Traditionally, the executor pays the estate duty on behalf of the deceased's estate, but there are instances where the beneficiary will be responsible for these charges. For example, if a policy is payable to a beneficiary, the estate duty related to that policy is paid by the beneficiary.

Estate duty must be paid within 1 year of the date of death (or within 30 days from the date of assessment, if an assessment is issued within 1 year of the date of death). If you don’t pay the tax on time, you’ll be charged an interest rate of 6% per year.


Double taxation on estate duty

Assets may be subject to estate duty tax in both South Africa and their native country in the case of a foreign inheritance, which could result in double taxation. South Africa has estate duty agreements with several nations (including the USA, the UK, Zimbabwe, Botswana, Lesotho and Eswatini) to avoid double taxation. If no agreement is reached, you may request relief from double taxation in line with domestic laws.

Capital gains tax

Inherited property may also be subject to capital gains tax (CGT). You may have to pay CGT as part of your income tax when you sell an asset like property (or even stock) for more than its original cost.

Find out how you can best use trusts for estate planning to minimise the tax bill your beneficiaries will face

CGT is governed by the Income Tax Act, 58 of 1962, and capital gains are taxed at a lower rate than regular income tax. However, not all assets are subject to CGT, and some capital gains and losses are ignored. This can get complicated, and you should consult a tax professional to avoid any irregularities.

If you’re a non-resident who sells a property, there’s also a withholding tax that you must pay. This means that the buyer will withhold a part of the payment (7.5% for a natural person) as an advance payment for your final income tax bill.

Using trusts for estate planning

Trusts have become increasingly popular as a tool for estate planning because they provide security, tax benefits, and control over asset distribution. One of the primary benefits of trusts is the ability to separate personal and business assets, which can help protect them from financial risks and preserve wealth.

If you add a property to your trust, you can avoid various costs and taxes that would otherwise occur on the property in the event of your death. As a trust does not die, it is not subject to estate duty, transfer duty, executor’s or conveyancer’s fees, or CGT. This means that your trust and the property in it will not be affected by your passing. Plus, if your heirs are beneficiaries of the trust, there's no need to transfer the property into their names. Additionally, any income generated by the property will be for the trust, and the trust’s account will cover expenses such as maintenance and bills.

By having property registered in a trust, the value of your personal estate will be reduced, lowering your estate duty exposure. And even though trusts are taxed at the top marginal rate, trustees can distribute rental profits to beneficiaries to minimise the tax burden. Certain types of trusts, such as inter vivos trusts, which are created while you are still alive, can also help to minimise the impact of estate duty on the assets owned by the trust.

Another benefit is that you and your beneficiaries do not own the assets held in the trust. This can help protect assets. In contrast, if assets are willed directly to individuals upon your death, they may be subject to claims from creditors or other legal issues. In the case of multiple beneficiaries, if one of them were to pass away, the trust structure ensures that the remaining trustees can continue to enjoy the assets of the trust without any disruption.

Inheriting a property comes with legal and financial complexities that must be considered carefully, including estate duty, CGT, and potential double taxation. Consult a financial professional to find out how you can best use trusts for estate planning to minimise the tax bill your beneficiaries will face.