Are your clients prepared for their CGT bill?

Investments that have seen good growth over the last ten years should add to your clients’ net wealth. “But returns won’t be as good as anticipated when capital gains are realised and capital gains tax paid,” says Kobus Wentzel, Executive Head of Sales and Distribution at 1Life Insurance. We look at how capital gains tax works, how it can reduce returns and how to plan ahead to minimise its impact.

How CGT works

Capital gains tax (CGT) was introduced in October 2001, on gains realised on the sale of certain assets such as discretionary investments. 40% of the gain less any exclusions must be included in taxable income when the gain is realised, as at February 2025.

• Formal retirement savings including pension, provident and preservation funds as well as retirement annuities are exempt from CGT, as are tax-free savings accounts.
• Primary residences (the home where you live) are exempt up to a value of R2 million.
• The annual capital gains exclusion is R40 000 (cannot be rolled over), or a R300 000 exclusion of gains in the year of a taxpayer’s death if the annual exclusions have not been used, as at February 2025.

All assets have a base value for CGT purposes, such as the cost when purchased, market value of the asset if acquired by donation or inheritance, or the calculated base value if the asset was purchased before CGT was introduced.

You can read more about CGT on the SARS website, including the different rates and rules for individuals, trusts and companies. Tax practitioners will also be able to assist with CGT information and calculations.

R108 240 CGT on a R100 000 investment!

When an investment is left to grow for the long-term, the CGT bill could be higher than expected. For example, an investment of R100 000 in the JSE All Share in 2001 that has grown to around R800 000 and is sold in 2025, could result in a R108 240 CGT liability.

The capital gain on this investment is R700 000, of which 40%, after the R40 000 exclusion is applied, must be included in taxable income. If this amount, R264 000, is taxed at the taxpayers’ marginal tax rate of say 41%, an additional amount of R108 240 is due to SARS, and the net gain for the investor is R591 760*.

CGT may also have a worse than anticipated effect on property. Although the first R2 million of a gain is excluded on a primary residence, property prices over the past 20 years have risen significantly, despite low returns from residential property in the last few years. For example, according to Statista, property prices in South Africa grew over 20% in 2003 (24.7%), 2004 (35.3%) and 2005 (23.9%), which means a R1million property in 2001 could easily be sold for over R4 million today. Taking exemptions into account, as well as sales costs of say R200 000, 40% of a gain of R800 000 must be included in taxable income, leaving the taxpayer with an amount due of R131 200.

(Proceeds of R4 million less purchase price (R1 million) less selling costs (R200 000) less the R2 million primary residence exemption) = R800 000, of which 40% is included in taxable income.)

Thanks to Jacques Fourie, Director of FMJ Financial Services, for his help with these calculations.

The bottom line

Without planning ahead for CGT, these tax bills could reduce clients’ wealth significantly.

Financial advisers need to work with clients to ensure future CGT bills don’t destroy their wealth-building efforts and leave dependants and heirs without assets and funds.

Help your clients plan ahead and minimise the CGT bill

Financial advisers can help clients minimise CGT bills, make use of tax-efficient investments, and ensure adequate cover in their estates for any CGT liabilities.

Review your clients’ potential capital gains and CGT commitments annually

When conducting annual reviews, take CGT into consideration so clients can plan ahead to cover any CGT bills, or be aware of the impact CGT will have on their investment’s returns when they sell. There are instances where clients can realise a gain to make use of the annual R40 000 exemption, but this will need to be weighed up against possible future returns. It is a “use it or lose it” exemption, and clients need to be aware that it could minimise future CGT bills.

Ensure clients use tax-efficient investments

This is one of the most effective ways of reducing CGT payable in future. Retirement annuities and tax-free savings accounts (TFSAs) are exempt from CGT, in addition to any non-discretionary retirement savings such as pension funds. It makes sense to use them when potential CGT bills are high.

Also be aware of investment transactions that trigger a CGT event such as switches between unit trust funds and investment management companies. When clients trigger multiple CGT events, they could significantly reduce any investment gains.

Your product providers can also assist with information on tax-efficient investments including endowments and structured products.

Help clients plan for liquidity in their estates

It is devastating when a loved one passes away and a family has to sell assets to meet obligations. While there has always been a focus on planning ahead for estate duty and costs in particular, CGT is little mentioned. However, CGT can easily double the tax due by the estate, requiring far more liquidity or the sale of assets.

Products such as the 1Life Wills and Estate benefit can be used to work out potential tax bills and ensure there are funds to meet these. Clients may also opt for life cover, or to increase cover as needed over time to meet these taxes.

Work with a tax expert

Just as Jacques Fourie helped us with this article, you and your client may also need to work with a tax expert well-versed in CGT to ensure they know what their obligations could be and how they can use all deductions and exemptions! CGT is a complex area, and each client’s circumstances differ, meaning different CGT effects and amounts due. If you and your client are unsure or want expert advice, consult a tax expert.

 

*Figures are for illustrative purposes only, exact amounts due will depend on individual circumstances and tax rates as well as rebates, allowable deductions, exclusions and exemptions