Liberty Legal Marketing Specialist Geraldine Macpherson looks at the implications of the Davis Tax Committee recommendations on your estate planning and why you need to keep them in mind when making investment and insurance decisions.

Geraldine Macpherson, Liberty’s Legal Marketing Specialist looks at the implications of the latest tax recommendations on your future financial planning.

Last month, the Davis Tax Committee issued a further update on its recommendations to overhaul our tax system. Even though, at this stage, it’s not legislation and it may never be introduced, it’s important to be aware of the direction our tax legislation may be moving in. While we don’t recommend taking any immediate action, unless these provisions become law, if you’re acquiring new assets or making new investments, consider the implications of the proposals.

An important provision in the recommendation is to remove the estate duty, donations tax and capital gains tax exemptions between spouses. This will require important changes to financial planning in the future and the need to build up assets equally between spouses.

The recommendations include:

1. Increasing estate duty abatement to R15 million
This means that estate duty will only become payable on estates worth more than R15 million. Currently, the abatement is R3,5 million. This dramatic increase recognises the weakness of our currency and the measure of true wealth in a more international sense. The rate of estate duty tax will remain 20% on estates between R15 million and R30 million, but will then increase to 25% for estates valued over R30 million. Individuals whose estates fall between R3,5 million and R15 million may be able to save on risk cover that’s been put in place to provide for estate duty tax.

2. Spouses to pay estate duty
Currently, spouses can leave their entire estate, irrespective of value, to their surviving partner without incurring estate duty. The recommendation is to remove this exemption, which means that all beneficiaries would be viewed equally when it comes to estate duty, irrespective of your relationship status. Given that not all long-term relationships are formalised through marriage, this is in a sense fairer than the current system, which only benefits formalised relationships. It also frees an individual to allocate their estate according to their wishes, rather than for purely tax-efficient reasons as no single beneficiary receives preferential tax treatment.

3. Capital Gains Tax between spouses
Currently, any assets bequeathed to a spouse are also exempt from capital gains tax. In line with the changes to estate duty, the Davis Tax Committee is recommending that spouses no longer enjoy the capital gains tax exemption, although it also recommends that the death exclusion on capital gains tax increase from R300 000 to R1 000 000. This could have major implications for “asset-rich” couples. If, for example, a spouse wishes to bequeath his business to his spouse, he’ll now have an estate duty and capital gains liability and will need to provide liquidity to meet those taxes. This would also affect an individual who’s built up a physical property portfolio during their lifetime, which is intended to provide rental income to the couple in their retirement.

4. Donations tax between spouses
The Davis Tax Committee has recommended that donations between spouses no longer be exempt from donations tax, although it has made it clear that assets and cash donated between spouses as a matter of practicality should be allowed if it is for the purposes of maintenance and day-to-day living. However, if the idea is to transfer capital so that the other spouse can invest and enjoy the returns of that investment, then donations tax would apply. In their words, the money or asset must be used up during the course of a year. However, it would appear that the current R100 000 per annum tax-free donations threshold will continue. Tax-free donations between spouses are often used in estate planning and in business succession planning, and the loss of this exemption would have an immediate effect, possibly greater than we anticipate.

It’s important to keep abreast of these potential changes and to start thinking about your estate planning differently going forward. Should these changes come into effect, the substantial increase in death taxes for asset-rich individuals will require careful planning to ensure policies or liquid assets are in place to provide liquidity.

What will happen to your Own your life Rewards?

If you are a member of the Own your life Rewards programme you should by now have received notification that we are winding down the programme which will be discontinued next year on 31 March 2017.

For more information on this, please contact your financial adviser or visit www.ownyourliferewards.co.za

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