More Useful Stuff
Did you know that Capital Gains Tax might be applicable when you pass on?
And you thought that you only needed to provide enough life cover to settle debt and provide income?
Well, if you are leaving assets to anyone else but your spouse, it’s going to be seen as a disposal and any capital gain made will be taxed.
How much life insurance do you need to take out to cover that?
What you need to know about death and capital gains tax is the following:
When you pass away you are deemed to have disposed of your assets (on the day before your death).
– CGT is levied on the growth in the value of the assets in the hands of the deceased
– Assets left to a spouse don’t attract CGT
– R120, 000 of any gain is excluded from taxation upon death
– 25% of the gain that remains is included in your income tax calculation
– The 25% gain which is carried over to your income tax calculation is taxed at your marginal rate of tax (yes your income tax needs to be finalized at death)
So how much extra life cover do you need to take out for capital gains tax?
Let’s look at an example:
Frik is married to Fransina with an Anti Nuptial Contract (what’s yours is yours and what’s mine is mine). Frik passes away and leaves everything to his wife except his R3, 5 million farm in the Northwest province. That particular asset he bequeaths to his son Francois. That is seen as a disposal to the estate by the deceased and attracts Capital Gains Tax (CGT). The market value of the farm was R3,5 million (the day before Frik died) and the base cost of the asset was R1 million (back in 1st October 2001).
So here is the calculation:
R3 500 000 (market value of the asset) less R1 000 000 (base cost of the asset on the 01/10/2001)
= R2 500 000
Now we knock off the exclusion on death which is R120 000 (everyone enjoys this exclusion at least once in their lifetime) and that leaves us with R2 380 000. 25% of that gain (R595 000) is then included in Frik’s taxable income for the year and is taxed at his marginal tax rate.
The important points here to remember are the following:
– Market value of asset, less base cost is the amount included for CGT purposes
– Knock off the exclusion on death of R120 000
– 25% of the balance is then included as taxable income and taxed at your marginal tax rate
So that’s it. Frik needed to make a life cover provision of R595 000 just to cover the CGT.
* For more money matters check out: http://www.insurancefundi.co.za