The Tax Treatment
Estate duty, capital gains tax, income tax, securities transfer tax and donations tax — each result depends on its own statutory provision, with its own conditions
Written by
Martin Kotze
Attorney, Conveyancer & Notary Public
Last reviewed:
Contents
Estate Duty: The Deemed-Property Rule and the Exemption
Estate duty is charged at 20% on the dutiable value of an estate up to R30 million and 25% above that, after the section 4A abatement of R3.5 million (up to R7 million where a predeceased spouse’s abatement was unused).
The starting point surprises many practice owners: under section 3(3)(a) of the Estate Duty Act, the proceeds of any domestic life policy on the deceased’s life are deemed to be property in the deceased’s estate — even if someone else owns the policy and receives the money. Left there, the rule would tax a buy-and-sell arrangement twice over: the deceased’s practice interest is property in the estate, and the policy proceeds paid to the surviving co-owners would be deemed property on top of it. (The deemed amount is reduced by any premiums the recipient personally paid, plus 6% a year interest on them — modest relief at best.)
Proviso (iA) is the escape hatch built for exactly this arrangement. The proceeds are not deemed property if the Commissioner is satisfied of three things.
| # | Requirement | What it means in practice |
|---|---|---|
| 1 | The policy was taken out or acquired by a person who on the date of death was a partner of the deceased, or held a share or like interest in a company in which the deceased held a share or like interest | The policy owner must be a co-owner — and still be one when the deceased dies. Partnerships, private companies, incorporated practices and close corporations ("like interest" covers a member’s interest) all qualify. A sole proprietor’s key employee, an outside successor, or anyone who has not yet acquired their stake does not. |
| 2 | The policy was taken out for the purpose of enabling that person to acquire the whole or part of the deceased’s interest in the partnership, or the deceased’s share or like interest in the company and any claim by the deceased against that company | The purpose must be the buy-out — which is why the policy should be linked to a signed buy-and-sell agreement recording that purpose. Loan accounts are expressly covered, but on SARS’s view only together with the shares: a policy aimed at the loan account alone does not qualify. |
| 3 | No premium on the policy was paid or borne by the deceased | Not one premium, not ever, directly or indirectly. This is the requirement that fails most often in practice. |
Meet all three and the proceeds flow to the surviving co-owners entirely outside the deceased’s dutiable estate — and, because the insurer pays the policy owners directly, outside the administration process too, untouched by the executor’s remuneration of 3.5% plus VAT and usually available far sooner than the months or years an estate takes to wind up (payment timing depends on the insurer and the claim; it is not guaranteed).
Requirement 3 is where arrangements fail. The three recurring fact patterns that destroy it — and the bookkeeping protocol that prevents them — are set out on the funding structure and premium traps page.
What the Exemption Does Not Do
Two boundaries are widely misunderstood.
The practice interest itself is still dutiable
The exemption removes the policy proceeds from the estate; the deceased’s shares and loan account remain property in the estate and attract estate duty on their value. What the arrangement changes is that the estate now holds cash equal to that value with which to pay the duty — instead of illiquid shares nobody may lawfully inherit. Note also that for estate duty purposes SARS values unlisted shares at their intrinsic value under section 5(1)(f)bis, ignoring restrictive valuation provisions in the company’s documents: the buy-and-sell price does not bind SARS, which is another reason to keep the agreement’s valuation honest and current.
If the exemption fails, the survivors pay the bill
Where proceeds are deemed property, the duty attributable to them is payable not by the estate but by the person entitled to the proceeds — the surviving co-owners (section 11(b)(i), apportioned under section 13). As an illustration, R6 million of proceeds taxed in full at the 20% rate means about R1.2 million of estate duty landing on the very people who needed the full amount to fund the purchase; the actual figure depends on the rest of the estate, the abatement and deductions, the premium adjustment and the rate that applies. A failed exemption does not merely lose a benefit; it creates a personal liability.
Capital Gains Tax
CGT touches a buy-and-sell arrangement at three points: the policy payout, the deceased’s deemed disposal at death, and the estate’s sale to the survivors.
The policy payout — disregarded
Paragraph 55(1)(c) of the Eighth Schedule is the CGT mirror of the estate duty exemption: the recipient disregards any capital gain on a policy taken out on the life of a co-owner to insure against the death, disability or illness of that person, by a partner or co-shareholder, for the purpose of acquiring that person’s interest (and claims against the company), provided no premium was paid or borne by the life assured while that other person was the beneficial owner of the policy.
Two differences from the estate duty version matter. Paragraph 55(1)(c) expressly covers disability and illness triggers, not just death — it shelters lifetime buy-out proceeds too. And its premium condition is time-limited to the current owner’s period of ownership, where the estate duty rule is absolute for all time. A policy can therefore pass the CGT test and still fail the estate duty test, and advisers who check only one of the two get a nasty surprise.
There are two further backstops: the original beneficial owner of a policy always disregards the gain under paragraph 55(1)(a), and since 2012 any risk policy with no cash or surrender value is disregarded outright under paragraph 55(1)(e) — even in second-hand (ceded) hands. Because buy-and-sell funding is almost always pure risk cover, CGT on the payout is rarely a problem in a sensibly built structure. But note carefully: the risk-policy backstop exists only in the CGT world. The Estate Duty Act has no equivalent, which is why the estate duty requirements do all the heavy lifting in structuring.
The deceased’s final return
Death is a CGT event. Under section 9HA the deceased is treated as having disposed of the practice interest at market value on the date of death, and the resulting gain lands in the final income tax return (the annual exclusion is raised to R440,000 in the year of death on the 2026 Budget figures; at the 40% inclusion rate and a 45% marginal rate the effective ceiling is 18%). This liability exists with or without a buy-and-sell agreement — the arrangement’s contribution is that the estate has the cash to pay it. The paragraph 57 small-business exclusion (up to R2.7 million of gains over a lifetime, on the 2026 Budget figures) can reduce it, but only if every condition is met. The size test looks at the market value of all the business’s assets (R15 million or less), not only its active business assets; the exclusion itself then covers only the part of the gain that relates to active business assets. The owner must also have held the interest and been substantially involved in the business for at least five years, and the disposal must follow age 55, ill-health, retirement or death. A company interest must be a direct holding of at least 10%, and there are further rules for owners of more than one business and a 24-month window for realising the gains.
The estate’s sale to the survivors
The estate is treated under section 25 as acquiring the interest at its market value at death. When the executor then transfers it to the surviving co-owners at that value under the agreement, there is little or no further gain — only post-death growth is taxed. The buyers’ base cost in the acquired interest is the price they actually paid, giving them a full step-up for their own eventual exit.
Income Tax
Premiums are not deductible
Premiums a co-owner pays on buy-and-sell policies are capital in nature and not incurred in the production of income. The section 11(w) deduction is confined to conforming employer-owned policies and does not extend to policies co-owners hold on each other. Budget for premiums out of after-tax money.
Proceeds are not gross income
The payout is capital in the policy owner’s hands, and section 10(1)(gI) in any event exempts amounts received under a policy of insurance relating to the death, disablement, illness or unemployment of the person insured. Together with paragraph 55, this is what makes the funding leg tax-free across the board.
Practice-paid premiums invite trouble
Beyond the estate duty trap, a premium the practice pays for a director or employee without recovering it can be a taxable fringe benefit — and for a pure shareholder, risks being treated as a distribution. A premium charged against the owner’s genuine credit loan account is different: that is the owner’s own money. What the ledger entry really is decides the tax, so have it checked.
The Transfer Itself: STT, VAT and Transfer Duty
Securities transfer tax
The transfer of the deceased’s shares (or CC member’s interest — the definition of “security” in the Securities Transfer Tax Act 25 of 2007 includes both) attracts STT at 0.25% of the higher of the consideration or market value, unless an exemption applies. Under section 6(2) the company that issued the unlisted security is liable to pay the tax, and section 7 lets it recover the amount from the person to whom the security is transferred. The buyer must tell the company about the transfer within 30 days, and the company must pay SARS within two months after the end of the month in which the transfer took place. An agreement may require the buyer to fund the STT at completion, but that is a term of the deal, not the SARS deadline. Shares passing to an heir by inheritance are exempt — but a buy-and-sell purchase is a sale, not an inheritance, so that exemption does not help and STT normally applies (check whether any other exemption fits the facts). On a R5 million parcel that is R12,500: not a planning driver, but a compliance step that is easy to forget — along with registering the transfer in the securities register under section 51 of the Companies Act 71 of 2008, without which the survivors never become registered holders.
VAT
The sale of shares or a member’s interest is an exempt financial service — no VAT. A partnership buy-out needs more care. A partnership is generally not a separate legal person, but the Value-Added Tax Act 89 of 1991 treats it as a separate person and vendor, and section 51 has continuity rules for when the partners change. So the VAT result of a partner’s exit depends on the actual transaction: a partnership that carries on with new or fewer partners is not treated the same way as a practice that ends up with one person trading alone. Where an enterprise is actually sold, going-concern zero-rating may be available if all the conditions are met (both parties registered vendors, written agreement, income-earning activity transferred — the requirements are strict). It is not automatically needed, or available, for every change of partner.
Transfer duty
None on a share transfer unless the company is a “residential property company” (more than half its asset value in residential property). A practice that owns its consulting rooms or office building — commercial property — is outside the net. Where transfer duty does apply to a share purchase, do not simply add STT on top: check the STT exemption for transfers that are subject to transfer duty.
Donations Tax and Connected-Person Pricing
Start by checking whether the buyer and seller are connected persons. Unrelated individuals are not connected to each other just because they own shares in the same company — SARS says so in Interpretation Note 67 (paragraph 3.11). Partners in a partnership are treated differently, and co-owners can still be connected for another reason: they are relatives, or they hold through family trusts or related companies. Two separate rules can then bite on a transfer at a price out of line with market value. Paragraph 38 of the Eighth Schedule can substitute market value for CGT purposes where the transfer is a donation, is for a price that cannot be measured in money, or is between connected persons at a non-arm’s-length price. Section 58 of the Income Tax Act can treat the shortfall in an undervalue sale as a deemed donation taxed at 20% (25% above R30 million of cumulative donations), whether or not the parties are connected. Each rule has its own conditions; a stale price does not automatically trigger both.
A death-triggered sale at a stale price can raise these issues for the estate and buyers. A lifetime buy-out on disability, illness or retirement at a stale price walks straight into them. The cure is the same annual valuation discipline the estate duty exemption already demands.
A Worked Example
The facts
Three specialists — A, B and C — own an incorporated practice in equal shares. The practice is worth R15 million, so each share parcel is worth R5 million; A also has a R1 million credit loan account. A’s base cost in the shares is R500,000. Under the buy-and-sell agreement, B and C each own a R3 million risk policy on A’s life (covering half of A’s R5 million equity plus half the R1 million loan account each), pay the premiums personally, and the agreement records the acquisition purpose. A dies.
The funding leg
The insurer pays B and C R3 million each, directly.
Once the insurer has paid — usually well before the estate is wound up — B and C hold R6 million earmarked for the purchase.
The estate leg
A’s final return includes the section 9HA deemed disposal of the shares at R5 million: a R4.5 million gain, less the R440,000 year-of-death exclusion, leaves R4.06 million, of which 40% (R1.624 million) is included in taxable income — CGT of up to about R731,000 at the top marginal rate, less if paragraph 57 applies.
The estate sells the shares to B and C for R5 million (its own market-value base cost, so no further gain) and is repaid the R1 million loan account at face value (no tax on repayment of capital). The estate now holds R6 million in cash in place of the practice interest. Estate duty is calculated on A’s estate including that R6 million of value — the exemption never removed the interest itself — but only once, and there is money to pay it. STT of R12,500 (0.25% of R5 million, assuming no exemption applies) is payable on the share transfer, and the company registers B and C as holders of A’s shares.
The counterfactual: one ledger entry, about R1.2 million
Same facts, but the practice had been paying all the premiums and debiting each premium to the loan account of the person whose life was insured — so the premiums on A’s life were charged to A, not to B and C who own the policies. A bookkeeping choice nobody thought about. A has borne premiums on the policies on his own life, and requirement 3 fails.
The R6 million of proceeds (less the trivial premium adjustment) is deemed property in A’s estate. Assume the rest of A’s estate already uses up the abatement and the 20% rate applies: the estate duty attributable to the proceeds is then roughly R1.2 million, payable by B and C personally. On other facts the figure will differ — it is a calculated liability, not a fixed penalty. The scheme still forces the sale — but on these assumptions about a fifth of the funding has evaporated, and B and C must find the shortfall at exactly the moment the practice has lost a third of its fee income.
Key Figures (2026/27)
| Item | Figure |
|---|---|
| Estate duty | 20% of dutiable estate up to R30 million; 25% above |
| Estate duty abatement (s 4A) | R3.5 million (up to R7 million with a predeceased spouse’s unused portion) |
| CGT inclusion rate — individuals | 40% (maximum effective rate 18%) |
| CGT annual exclusion | R50,000; R440,000 in the year of death (2026 Budget figures — see the note below; previously R40,000 and R300,000) |
| CGT small-business relief (para 57) | Up to R2.7 million of qualifying gains over a lifetime; only where the market value of ALL the business’s assets is R15 million or less (2026 Budget figures — see the note below; previously R1.8 million and R10 million); held and substantially involved for 5 years; age 55+ or ill-health/death |
| Securities transfer tax | 0.25% of the higher of consideration or market value, unless an exemption applies |
| Donations tax | 20% (25% above R30 million cumulative); R150,000 annual exemption for natural persons, shared across all of the donor’s donations for the year (SARS-published figure from the 2026 Draft Rates Bill — see the note below; previously R100,000) |
| Dividends tax (relevant to buy-back routes) | 20% |
| Executor’s remuneration (maximum tariff) | 3.5% of gross estate assets plus VAT |
| VAT | 15% (share transfers exempt as financial services) |
Figures are the 2026/27 amounts announced in the February 2026 Budget and published by SARS. The increased donations-tax exemption, CGT exclusions and small-business limits come from the 2026 Draft Rates Bill; we have not confirmed that those increases have been promulgated, so the earlier amounts are shown alongside them. Rates change annually — check the current SARS tables before relying on any calculation.
Get the Tax Structure Right the First Time
Several of these choices cannot be repaired after the event. If you are setting up a buy-and-sell arrangement — or testing one that has been running for years — talk it through before the trigger event, not after.
Practice Succession Knowledge Hub
The complete guide to buy-and-sell agreements for South African professional practices, split into the parts you are most likely to need.
Buy-and-Sell Agreements for Professional Practices
The pillar guide — what happens without one, the two legs, validity, and what is actually being bought.
Funding Structure & the Premium Traps
Cross-holding, the structures to avoid, and the three premium mistakes that destroy the estate duty exemption.
Profession Rules: Who May Buy
Attorneys under the LPA, health practitioners under the HPCSA rules, and the auditors’ six-month statutory clock.
The Agreement & What Goes Wrong
The clause-by-clause checklist, disability and lifetime buy-outs, the twelve failure modes, and the roadmap.
Frequently Asked Questions
The questions practice owners actually ask — premiums, family trusts, loan accounts, new and departing partners.
Why you can trust this: Martin Kotze has been an admitted Attorney of the High Court of South Africa, registered Conveyancer, and Notary Public since 2014, practising from Pretoria. The firm is regulated by the Legal Practice Council under firm registration 17444.
This guide is general information, not legal advice for your specific matter.