Maximizing Estate Planning and Estate Duty Relief: Section 4(q) Deduction

by | Jun 28, 2024 | Advisory Services | 0 comments

One of the most significant mechanisms for estate planning and Estate Duty relief in South Africa is the Section 4(q) deduction. This provision allows all inheritances bequeathed to a spouse to be exempt from the dutiable estate when calculating Estate Duty. The primary objective of this exemption is to provide financial relief for a surviving spouse following the loss of the family’s breadwinner.

In April 2016, the Davis Tax Committee scrutinized Section 4(q) concerning Estate Duty. According to Section 4(q) of the Estate Duty Act 45 of 1955:

4(q) so much of the value of any property included in the estate which has not been allowed as a deduction under the foregoing provisions of this section, as accrues to the surviving spouse of the deceased: Provided that-

  • (i) the deduction allowable under the provisions of this paragraph shall be reduced by so much of any amount as the surviving spouse is required in terms of the will of the deceased to dispose of to any other person or trust;
  • (ii) no deduction shall be allowed under the provisions of this paragraph in respect of any property which accrues to a trust established by the deceased for the benefit of the surviving spouse, if the trustee of such trust has a discretion to allocate such property or any income therefrom to any person other than the surviving spouse.

The act itself does not define “spouse,” so the definition is derived from the Income Tax Act 58 of 1962 (as amended), which defines a spouse as:

“spouse”, in relation to any person, means a person who is the partner of such person—

  • (a) in a marriage or customary union recognised in terms of the laws of the Republic;
  • (b) in a union recognised as a marriage in accordance with the tenets of any religion; or
  • (c) in a same-sex or heterosexual union which is intended to be permanent, and “married”, “husband” or “wife” shall be construed accordingly:

Provided that a marriage or union contemplated in paragraph (b) or (c) shall, in the absence of proof to the contrary, be deemed to be a marriage or union out of community of property;

A critical element in this definition is that the relationship between the parties is intended to be permanent and that there is evidence to support this. Although the definition is broad and many family units may benefit from it, the Davis Tax Committee noted that it is still not inclusive enough. Many households that lose their breadwinner are not spousal households and are thus excluded from the Section 4(q) deduction. Examples include:

  • Single-parent families (divorced or never married)
  • Families supported by grandparents
  • Families supported by children
  • Families supported by relatives or friends

As a result, if any breadwinner in these households passes away, the inheritance payable to the family would not enjoy any exemption and would be included in the Dutiable Estate, making it subject to Estate Duty. The Davis Tax Committee ultimately recommended removing the Section 4(q) deduction and instead increasing the primary abatement.

Until the primary abatement is increased from R3,500,000 (which was set at this amount on 1 January 2010), there are several strategies to maximize reliance on the Section 4(q) deductions:

1. Bequeath Your Entire Estate to Your Spouse

By bequeathing your entire estate to your spouse, the entire estate will not be subject to Estate Duty. This allows your spouse to receive their inheritance without this additional tax burden.

2. Vested Trusts

Blended families often include second spouses who do not share the same children. A vested trust ensures your spouse is taken care of during their lifetime while also catering for your children. In this arrangement, the spouse is the vested income beneficiary, and the children are the vested capital beneficiaries. This satisfies the Section 4(q) requirements, making the income deductible from the dutiable estate, while also providing for your children after your spouse’s death.

This certainty is especially important if your children reside outside South Africa. They will receive an inheritance through a vested trust which is recorded as an inheritance rather than a trust distribution, offering the tax certainty of an inheritance in their home jurisdiction.

3. Usufructs

If trusts are not appealing, setting up a usufruct through your will is another option. In this arrangement, you bequeath the assets to your children but grant a usufruct to your spouse, allowing them to use and enjoy the assets during their lifetime. The usufruct arrangement qualifies under Section 4(q), with the present value of the usufruct calculated by multiplying the asset value by 12% and adjusting this result for life expectancy of the usufructuary. The usufruct so calculated will be deductible from the dutiable estate.

4. Life Partnerships / Co-Habitation Agreements

To meet the definition of “spouse” under Section 4(q), demonstrating an intention for a permanent relationship is crucial. Co-habitation agreements are an excellent way to record this intention, establishing co-dependency without sharing profit and loss. Such an agreement can be sufficient evidence of a permanent relationship.

If you need assistance setting up any of these structures, Sentinel International Advisory Services is equipped and experienced to provide the necessary advice and assistance.

For further guidance or to discuss your specific estate planning needs, please contact us.

Savannah Dawson

Bcom (LLB) LLB

Admitted Attorney

Legal and Cross Border Consultant