A smart way to cut estate duty without triggering unnecessary tax

My father is a widower and has just been diagnosed with cancer.

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The prognosis is not good and I'm helping him to tidy up his affairs to make the inheritance process easier. I am his only child.

His assets consist of a house worth R4-million and various share investments worth R8-million. To reduce his estate duty bill, we are thinking of transferring the house to his only grandchild while he is still alive.

Does this make sense? Are there any other factors we should consider?

Answer

Although it may seem like a good idea to transfer assets before death to reduce estate duty, doing so can actually result in higher tax costs during your father’s lifetime. This is because of:

Immediate payment of capital gains tax (CGT)

If your father transfers the house to his grandchild now, he will trigger a CGT event.

He will need to pay tax on the growth in value of the property from when he bought it until the date of transfer. This could be substantial, especially if the house has appreciated significantly.

Donations tax

Donating the house (valued at R4-million) to the grandchild will also trigger donations tax at 20% on the value above the R100,000 annual exemption. This means that your father will have to pay donations tax of R780,000.