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QUESTION TWO (40 MARKS)

You are a clerk at a firm of lawyers. Your partner has recently been appointed as the executor of an estate. In terms of section 7(1) of the Estate Duty Act, each executor must submit an estate duty return to the Commissioner. Your partner has requested your assistance with the calculation of the estate duty. He has supplied you with the following information:

Name of deceased: Hein Preller.
Date of death: 23 August 2021 (at the age of 57).
Date of birth: 15 September 1963.
Usual place of residence: Roodepoort, South Africa.
Marital status: married out of community of property to Isabel Preller.
Assets, rights and liabilities

A residence in Roodepoort valued at R1 200 000. This residence is bequeathed to Hein’s son, John. During 2011, with the written approval of Hein, John effected improvements to the residence at a cost of R40 000. These improvements increased the value of the residence by R100 000 on the death of Hein.
Furniture and private property valued at R850 000.
A motor vehicle valued at R235 000.
Twenty-five years ago, Hein obtained the usufruct of a holiday flat from his father. When his father died six years ago, he bequeathed the bare dominium of this holiday flat to Hein’s son, John, on the condition that John had to pay R15 000 in total to his sister. John was 24 years old on the date of Hein’s death. The value of the holiday flat on Hein’s death was R570 000.
The farm “Witklip” in the district of Brits with a market value of R1 514 286 (on which bona fide farming operations are carried on).
A R100 000 fixed deposit in a bank. Accumulated interest on this fixed deposit to his date of death was R5 000. After his death, a further R3 000 accrued.
The return on policy A was R525 000. It was paid to his estate. Premiums and interest at 6% on policy A (paid by Hein) amounted to R25 000.
The return on policy B was R750 000. It was paid to his surviving spouse. Premiums and interest at 6% on policy B (paid by Isabel) amounted to R25 000.
The return on policy C was R175 000. It was paid to John Dann, a joint shareholder with the deceased in JD (Pty) Ltd. Premiums and interest at 6% on policy C (paid by John Dann) amounted to R75 000. John Dann took out the policy on Hein’s life, so as to make cash available to obtain Hein’s shares in JD (Pty) Ltd. Half the share capital of JD (Pty) Ltd was owned by Hein. No premiums on this policy were paid by Hein.
The return on policy D on the life of Hein was R200 000. It was paid to JD (Pty) Ltd. Premiums and interest at 6% on policy D (paid by JD (Pty) Ltd) amounted to R50 000.
An auditor’s valuation of the 50% interest in JD (Pty) Ltd was R150 000 (excluding the policy referred to above). The Hein’s shares in JD (Pty) Ltd were, however, sold for R120 000 to John Dann in terms of an agreement between the deceased and John.
A lump-sum benefit of R90 000 was paid to Isabel by the ABC Pension Fund.
A monthly pension of R1 500 was payable by the ABC Pension Fund to Isabel for the rest of her life. She was 59 years old at the time of his death.
Shares in a foreign company were sold for the rand equivalent of R250 000. This foreign company is listed on a stock exchange in New York. Six years ago, Hein inherited these shares from the estate of his father, who was ordinarily resident in South Africa. In his father’s estate, the estate duty payable on these shares was R25 000. The shares were valued at R100 000 on the date of his father’s death. Hein paid the R25 000 estate duty. No part of the liabilities or expenses of the estate relates to these shares.
A house (immovable property) in London, United Kingdom, was sold for the rand equivalent of R5 050 000. It was donated to Hein in 2003 by his grandmother, who was ordinarily resident in London.
The mortgage loan on the property in London (see above) at the rand equivalent of R850 000 was repaid by the executor.
An accrual claim of R343 682 in favour of Isabel.
His bank overdraft balance was R45 000.
Hein enjoyed an annuity of R180 000 that was charged against property. When he died, this annuity ceased. When Hein died, the owner of the property, Albert Stander, was 56 years old. Albert Stander did not donate the annuity to Hein.
The only other bequest to Isabel was R250 000 in cash.

YOU ARE REQUIRED TO:

Calculate the estate duty liability of the estate of the late Hein Preller.

1 answer

To calculate the estate duty liability of Hein Preller’s estate, we first need to determine the gross estate value and then apply the relevant deductions. Here is a structured approach to the calculation:

1. Determine the Gross Estate Value

Assets:

  1. Residence (Roodepoort): R1,200,000
  2. Furniture and private property: R850,000
  3. Motor vehicle: R235,000
  4. Usufruct of holiday flat valued: R570,000 (John has bare dominium, therefore, this value is included)
  5. Farm “Witklip”: R1,514,286
  6. Fixed deposit: R100,000
    • Accumulated interest up to death: R5,000
  7. Life policy A: R525,000
  8. Life policy B: R750,000 (paid to Isabel; excluded from estate as it is paid to spouse)
  9. Life policy C: R175,000 (joint shareholder, thus included)
  10. Life policy D: R200,000 (paid to JD (Pty) Ltd, thus included)
  11. Shareholding in JD (Pty) Ltd: R150,000 (auditor’s valuation)
  12. Pension Fund lump-sum: R90,000
  13. Transferred shares in a foreign company: R250,000
  14. House in London: R5,050,000
  15. Cash bequest to Isabel: R250,000

Total Gross Estate Value Calculation: \[ \text{Total Gross Estate Value} = 1,200,000 + 850,000 + 235,000 + 570,000 + 1,514,286 + 100,000 + 5,000 + 525,000 + 0 + 175,000 + 200,000 + 150,000 + 90,000 + 250,000 + 5,050,000 + 250,000 \] \[ = R10,445,286 \]

2. Determine Liabilities and Deductions

Liabilities:

  1. Bank overdraft: R45,000
  2. Mortgage loan on the London property: R850,000
  3. Annuity charged against property: R180,000 (charged against property not included in estate)
  4. Accrual claim in favor of Isabel: R343,682

Total Liabilities Calculation:

\[ \text{Total Liabilities} = 45,000 + 850,000 + 343,682 \] \[ = R1,238,682 \]

3. Calculate Net Estate Value

\[ \text{Net Estate} = \text{Gross Estate} - \text{Liabilities} \] \[ \text{Net Estate} = 10,445,286 - 1,238,682 = R9,206,604 \]

4. Apply Deductions for Estate Duty

In South Africa, the estate duty is calculated on the net estate after allowable deductions. The following deductions are relevant:

  • Exemption: The current Estate Duty threshold (as of 2021) is R3,500,000.
  • Bequests to Spouses: Any amount paid out to lawful beneficiaries is exempt.
  • The insurance policies paid to surviving spouse are not taxable in the estate.

5. Taxable Estate Calculation:

\[ \text{Taxable Estate} = \text{Net Estate} - \text{Exemption} \] \[ \text{Taxable Estate} = R9,206,604 - R3,500,000 = R5,706,604 \]

6. Calculate Estate Duty

South Africa has a marginal rate for estate duty as follows:

  • 0% on the first R3,500,000
  • 20% on the portion exceeding R3,500,000 but less than R30,000,000

The estate duty will therefore be calculated as: \[ \text{Estate Duty} = (R5,706,604 * 20%) = R1,141,320.80 \]

Conclusion

The estate duty liability for the estate of the late Hein Preller is R1,141,320.80.

This value may need to be rounded as per necessary accounting practices.