This month we explore what effect business interests have on inheritance taxes such as Capital Gains Tax and Estate Duty. Continue reading to see how it may apply to you and affect the legacy you leave for your loved ones.
Capital Gains Tax
When you pass away, you are deemed to have disposed of your assets. This includes any business interests you may have, such as shareholding and/or members’ interest, which will be used to calculate Capital Gains Tax.
The market value of the shares/members’ interest at date of death – The value at which you acquired the shares’/members’ interest= Gain (Will be taxable at a rate of between 7.2% and 18%.
If the value of the business is below R10 million and you held the interest in the business for five years or longer, it may qualify for the small business relief according to which R1,8 million of the gain may be disregarded.
For Estate Duty purposes, the value of all your business interests must be included in the calculation of your Estate as well as the proceeds of life policies as specified in terms of section 3(3) of the Estate Duty Act, which states that “so much of any amount due and recoverable under any policy of insurance which is a ‘domestic policy’, upon the life of the deceased is deemed to be property of the deceased”.
When business partners enter into a buy-and-sell agreement, according to which the members take out life insurance policies on the lives of the other shareholders/members with the sole purpose of using the proceeds to purchase the deceased partner’s interest in the business, these proceeds fall within the ambit of Section 3(3). However, if SARS is satisfied that the following requirements are met then the policy will not be included in the Estate for Estate Duty purposes:
1) The policy was taken out or acquired by a person who on the date of the death of the deceased was a partner of the deceased or held any share or like interest in a company in which the deceased on that the date held any share or like interest. For the purpose of enabling that enabling that person to acquire the whole or part of:
The deceased’s interest in the partnership concerned. The deceased’s share or like interest in that company and any claim by the deceased against that company.
2) No premium on the policy was paid or borne by the deceased.
The tax consequences of a buy-and-sell agreement between co-owners of a business are complex. It is, however, not the value of the policy that will have Estate Duty consequences, but the value of the business interest itself that will be included in the net value of property in the Estate.