Many people take out life insurance as a financial planning tool to ensure that their dependents, typically spouses and children, are financially secure in the event of their death. In practice, the insured makes regular contributions to an insurance company, and in the agreement, they nominate a beneficiary, the person who will receive the insurance payouts upon their passing. In this article, words denoting the masculine gender shall be deemed to include the feminine.
Insurance payouts
The insurance payouts will then be made by the insurance company to the dependents of the insured person to help the latter meet their financial obligations soon after the loss of the insured. Whilst life insurance is common and well known by the public, there is little to no information on the tax consequences of insurance payouts. This article is meant to shed light on the fact that the life insurance payouts trigger a little-known tax called inheritance tax chargeable in terms of the Capital Transfer Tax Act. Throughout this article, any reference to the incidence of the said tax shall be deemed to exclude exempt persons such as spouses, i.e., those which the said Act exonerates from paying the tax.
Inheritance Tax
The above-mentioned Capital Transfer Tax Act states that any recipient of a “gratuitous disposal” should pay inheritance tax as prescribed in that Act. The inheritance tax is a tax which is payable based on the fact that the recipient gets to enjoy something of value which they did not work or pay for. The said tax is payable to the Botswana Unified Revenue Service by the 30th of September of each year, that is within 3 months from the end of each tax year which closes on 30 June annually.
The said inheritance tax is determined using the market value of the inheritance that would have devolved to the said dependents. However, the tax is only payable to the extent to which the value of the inheritance exceeds P100 000 in aggregate. Tax is levied at rates which range from 2 percent to 5 percent and at the highest bracket, it is determined as P16 000 plus 5 percent on the excess over P500 000. Should it happen that there is more than one beneficiary, they equally share the P100 000 exemption at arriving at the applicable tax. As an example, if one dependent receives P 2.1 million as insurance payout after the passing on of their parent, they will only be taxed on P 2 million, that is (P16 000 + 5% x P 2m – P 100 000) = P 91 000.
The tax filing
To comply with the inheritance tax, every recipient of the insurance payout must register with the Botswana Unified Revenue Service to obtain a Capital Transfer Tax number. They must then file the Capital Transfer Tax return by 30th September and upon assessment, pay the tax due. However, since the inheritance taxes are usually once-off, the taxpayer may then deregister for that tax with BURS to avoid a scenario where they will have annual returns generated every year.
Conclusion
From the analysis above, any insurance payout that is received by a dependent or beneficiary after the passing on of an insured person is subject to tax whether the insurance policy was obtained by the insured personally or under group life covers provided by employers. The insurance company or employer does not have the obligation to deduct any taxes but such obligation rests on the beneficiary. However, lawyers, executors and any such person who administers estates must ensure that the beneficiaries pay this tax. Insurance companies also need to educate their insured clients about this tax. Should you wish to consult on this or any tax matter, please contact us on the details below.
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