An update on the Double CGT Trap

How often do we come across someone who owns a company which in turn owns a property? Very often! Now that is the worst possible structure that you can imagine from a tax point of view, especially since the 2017 budget.

The trouble is that when you die (or when the second of you dies if you leave everything to your spouse), your estate is subject to 20% Estate Duty. That's 20% of the value of those shares. But there’s a second tax. A dying person is deemed to have sold their assets at market value to their deceased estate at the moment of death and that sale will result in a deemed capital gain. CGT, which is now becoming a maximum of 18% (previously 16.4%), applies to the value of the shares at death minus the cost.

Let's say the company bought the property for R1m and when you died it was worth R3m. Your shares, which cost you nothing (well maybe R100 or so) are now worth R2m. Estate Duty, which is 20% of the R2m value of the shares less executor’s fees, amounts to R386K and CGT at 18% of the gain of R2m amounts to R360K. The total so far is R746K (see graphic), but that's not all! The chances that your estate will have that kind of cash lying around are pretty slim, so the executor will have to arrange to sell the property (even if he doesn't have to sell now, it will get sold one day). He sells the property for R3m (if he's lucky, bearing in mind that it is a forced sale), repays the original loan of R1m and sits with R2m in the company's bank account. From that he must pay CGT because the company made a R2m capital gain on the sale of the property! That's 22.4% of R2m or R448K. After paying the CGT over to SARS, the company is left with about R1,55m in the bank, but it's no good there, it is needed in the estate and the only way to get it there is to declare a dividend. Dividends Withholding Tax is now becoming 20% (previously 15%), so the R1,55m will only be R1,3m by the time it reaches the estate to pay taxes of R746K. The estate will finally be left with a mere R477K after it has paid the Executor's fees!

DoubleCGTTRap 

I have ignored allowances in the above as these are usually used up by the non-investment assets of the estate. I have also assumed that you die reasonably wealthy so that the maximum rate of CGT applies to your estate.

Note that whilst bequeathing your shares to your spouse will postpone the problem, it will not eradicate it.

The solution to the above is to hold the shares in a trust, because when you die, the trust does not die, so it does not pay any taxes as a result of your death..

Should you wish to make an appointment, please feel free to visit Derek's diary and book a time that suits you.

 

Accreditations & Memberships

South African Institute of Chartered Accountants. Designation CA(SA) Engineering Council of South Africa. Designation Pr(Eng)Independent Regulatory Board for Auditors. Designation RA<    Internationally Accredited Financial MediatorsMember of MENSA, the High IQ Society

 

 

 

Contact Details

Minentle : mini@harbourassociates.co.za

Tumi : tumi@harbourassociates.co.za

Derek : derek@harbourassociates.co.za

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Outside office hours (any day, any time): 083 385 0791

Skype: derek.peter.springett

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