In the previous sections, we explored the tax treatment of deceased estates, focusing on how assets are acquired and disposed of by the estate and its executor. In this fourth part, we will delve into the acquisition of assets by heirs or legatees, both resident and non-resident surviving spouses, as defined under sections 25(3) and 25(4) of the Income Tax Act. This section will clarify the tax implications for heirs and legatees acquiring assets from the deceased estate and outline the specific provisions applicable to surviving spouses. We will also examine how these rules ensure a fair and tax-neutral transition of assets while preserving the rights and responsibilities of beneficiaries. Understanding these regulations is essential for those involved in estate administration, ensuring compliance with tax obligations while maximizing the benefits of inherited assets.

Acquisition of Assets by Heirs or Legatees from the Deceased Estate [Section 25(3)(b)]

Under section 25(3)(b), heirs or legatees (excluding resident surviving spouses) are deemed to have acquired assets from the deceased estate for an amount equal to the expenditure incurred by the estate regarding those assets. The calculation of this expenditure depends on several factors:

• Market Value on Date of Death: If the asset was acquired by the deceased estate before death, the heir or legatee inherits it at the market value on the date of death, plus any additional costs incurred after that date.
• Cost Price of Purchased Assets: If the asset was purchased by the executor after the deceased's passing, the heir or legatee will acquire it at its cost price to the deceased estate.
• Nil Value for Naturally Increased Assets: For assets acquired by natural increase, such as livestock, no expenditure is incurred by the deceased estate. Therefore, the heir or legatee would acquire these assets at a value of nil.

This framework ensures that the value of inherited assets reflects their worth at the time of the deceased's passing while providing a tax-neutral basis for the heirs or legatees.

Acquisition of Assets by a Resident Surviving Spouse

Assets Acquired from the Deceased [Section 25(4)] Assets inherited by a resident surviving spouse are subject to a "roll-over" treatment under section 25(4). This means that:

• The surviving spouse inherits the base cost of the asset along with its entire history, including the date of acquisition and usage from the deceased spouse.
• No roll-over is not available for non-resident surviving spouses, as section 9HA(2) explicitly refers only to residents.

This roll-over provision does not exempt the spouse from capital gains tax (CGT); instead, it defers the tax liability to the time of the spouse’s eventual disposal of the asset. The surviving spouse will account for any capital gains or losses at that point.

Treatment of Assets Acquired from the Deceased Estate

Assets acquired by the resident surviving spouse from the deceased estate are governed by section 25(4), which treats the deceased, the deceased estate, and the surviving spouse as a single entity for tax purposes. This includes:

• **Date of Acquisition**: The date when the deceased acquired the asset.
• **Expenditure Incurred**: The expenditure incurred by the deceased and the estate regarding the asset, excluding any amounts specified in section 9HA(2)(b).

The surviving spouse inherits the right to any allowances or deductions previously applicable to the deceased, ensuring continuity in the treatment of tax obligations related to the asset.

Assets Acquired After Death

When the executor acquires additional assets after the deceased’s death, the resident surviving spouse is treated similarly to any other heir or legatee, acquiring such assets under section 25(3)(b) for an amount equal to the expenditure incurred by the deceased estate. However, they will not receive any deductions related to assets obtained through natural increase, as these do not involve incurred expenditure.

Direct Transfers to Heirs or Legatees [Section 9HA(3)]

In instances where an asset is transferred directly from the deceased to an heir or legatee (including non-resident surviving spouses), section 9HA(3) stipulates that the heir or legatee is considered to have acquired the asset at its market value as of the date of the deceased's death. This provision ensures that the tax implications of direct transfers align with the principles established for other inheritances, maintaining fairness in the treatment of inherited assets.

Conclusion

This section has outlined the intricacies of asset acquisition for heirs and legatees from deceased estates, emphasizing the specific rules applicable to resident and non-resident surviving spouses. Understanding these provisions is crucial for effective estate administration, ensuring compliance with tax regulations while maximizing the benefits derived from inherited assets. In the final part of this series, we will delve into the implications of capital gains tax, further enhancing your grasp of the financial responsibilities associated with managing a deceased estate.