QUESTION
In SARS's FAQ's they say FREQUENTLY ASKED QUESTIONS AND ANSWERS - ESTATES 1. What is the CGT implication with regard to a Deceased Estate (paragraph 40 of the Eighth Schedule to the Income Tax Act) 
(i) Deceased person (for the period until date of death) In terms of paragraph 40(1) of the Eighth Schedule to the Income Tax Act, 1962, a deceased person is treated as having disposed of his assets at market value to his estate as at date of death. The difference in value between the base cost of the assets and the market value thereof at date of death is regarded as a capital gain/loss which must be reflected in the income tax return [IT12] of the deceased as at date of death. 
(ii) Assets distributed to heirs Where the assets are distributed to the heirs, the market value of the assets in the deceased estate will be the base cost in the hands of the heirs. The result is that assets which devolve upon heirs will not at this point in time create a CGT liability in the deceased estate, but will on disposal thereof by the heir be subject to CGT 
DOES THIS MEAN THAT THE BASE COST HAS EFFECTIVELY BEEN RAISED TO MARKET VALUE IN THE HANDS OF THE HEIRS AND THE CGT IN THE ESTATE FALLS AWAY?

ANSWER
In the case of dearth of a taxpayer, there are 3 taxpayers involved:
� The deceased person
� That person's deceased estate
� The heirs of the deceased 

Deceased person
A deceased person must be treated as having disposed of his assets for an amount equal to the market value on the date of death.

The capital gain or loss is calculated as follows:

Proceeds: Market value
Less base cost: (Base cost as calculated)
= Capital gain/loss XXX 
Deceased estate
If any asset of a deceased person is transferred directly to the estate of the deceased person, the deceased estate is treated as having acquired the asset from the deceased person at a cost equal to market value of the asset at the date of death of the deceased person. This amount is treated as the base cost of the asset the estate incurred.

If the estates/executor disposes of the asset to an heir, the estate will be treated as having disposed of the asset for proceeds equal to its base cost (that is the market value on the date of death.

The capital gain or loss is calculated as follows:

Proceeds: Market value
Less base cost: Market value
= Capital gain/loss 0

No capital gain or loss will arise on the disposal of the assets by the estate to an heir. Capital gain or loss will only arise when the heir disposes of the asset at a later stage.

Heir
If an asset of a deceased person is transferred to an heir of the deceased person, the heir is treated as having acquired the asset from the deceased at a cost equal to the market value of the asset at the date of death of the deceased person.

The following show how the capital gains tax is treated of each of the 3 persons:

Deceased person Estate Heir

Asset

Proceeds MV
Less Base cost (BC)
Capital gain/loss xx

Asset

Proceeds MV
Less Base cost (MV)
Capital gain/loss 0

Asset

Proceeds ?
Less Base cost (MV)
Capital gain/loss xx


MV= Market value
BC = Base cost

The CGT in the estate does not fall away it is only postponed until the heir disposes of the asset.