Last week I promised to show an example of an actual capital gains tax calculation where someone has passed away in 2011.
If you can recall we discussed the fact that death is seen as a disposal of all assets on the day prior to death. So even if no asset is actually sold it is assumed that they were sold. This means that the executor of your estate has to get someone out to value all assets at market value. If there’s been a capital gain on the asset then capital gains tax could become a problem. The good news is that if these assets are left to a surviving spouse, then no capital gains tax is payable.
Let’s look at the example of Paul, who passed away in April 2011:
Paul has two major assets in his estate. The one is the home that he and Jean, his wife, live in and which is valued at R3 million. This was bought five years ago for R1 million. The other asset is a holiday flat in Shelley beach worth R1, 7 million, which was bought eight years ago for R900, 000.
In terms of Paul’s will, he leaves the main residence to his wife, Jean. The holiday home in Shelley beach is left to his son, Michael.
The main residence
| Market value | R3, 0 million |
|---|---|
| Less base cost | R1, 0 million |
| Equals capital gain | R2, 0 million |
| Less primary residence exclusion | R1, 5 million |
| Equals capital gain | R 500, 000 |
However, the main residence is being left to Jean. This means the capital gain is completely excluded from the calculation.
The holiday flat in Shelley beach
| Market value | R1, 7 million |
|---|---|
| Less base cost | R 900, 000 |
| Equals capital gain | R 800, 000 |
Because the holiday flat is being left to Michael, the full capital gain of R800, 000 is included in the calculation. If the flat had been left to Jean then no capital gains tax would have been payable.
| Capital gain | R800, 000 |
|---|---|
| Less annual exclusion | R200, 000 |
| Equals aggregate capital gain | R600, 000 |
Multiply this by the inclusion rate of 25% for individuals (R600, 000 x 25% = R150, 000)
and we get a taxable capital gain to be included in Paul’s income tax return of R150, 000
The executor would now need to increase Paul’s income by R150, 000 for income tax purposes. Michael will take ownership of the holiday flat and his base cost will be the R1, 7 million, which was its fair market value at the time of Paul’s passing away.
Of course, Michael can arrange to pay a portion of the capital gains tax liability if the executor is in the situation where he or she needs to sell the asset in order to pay the tax. The capital gains tax payable must however exceed 50% of the net value of Paul’s estate in order to qualify. Michael would also have three years to settle the tax bill.
That’s the situation for 2011.
Next time we are going to look at how it works from March 2012.
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Until next time.
The InsuranceFundi Team