Unlisted shares and deceased estates


This article examines some of the estate duty, capital gains tax (CGT) and dividends tax issues that arise when a person dies holding unlisted shares.

A person that dies is deemed to dispose of all his or her assets under section 9HA(1) of the Income Tax Act 58 of 1962 for an amount received or accrued equal to the market value of those assets at the date of that person's death. There are some exceptions to this rule, such as assets bequeathed to a resident surviving spouse, but for the purposes of this article I shall assume that they do not apply. The term 'market value' is defined in paragraph 1 of the Eighth Schedule and means market value contemplated in paragraph 31. Paragraph 31(3) provides that the market value of shares not listed on a recognised exchange must be determined at a value equal to the price which could have been obtained upon a sale of the share between a willing buyer and a willing seller dealing at arm's length in an open market. No regard must be had to any provision restricting the transferability of the shares or which seeks to prescribe how the shares must be valued. Paragraph 31(3)(b) contains a rule that applies when a person is entitled to a disproportionate amount of the assets of the company on winding up. It states that the value must not be less than a value determined on valuation date as if the company was in winding up.

The Act does not lay down a valuation method for valuing unlisted shares, and this can lead to disputes with SARS.

In C: SARS v Stepney Investments (Pty) Ltd [1] the taxpayer company had disposed of a 4,37% interest in a company holding a casino licence in two tranches during the 2002 and 2003 years of assessment. The taxpayer had used the market-value method to determine the valuation date value of the shares. The market value had been determined by using the discounted cash flow (DCF) method but SARS used the net asset value method and assigned a value of nil because of the various uncertainties surrounding the licence. In court SARS conceded that the net asset value method was inappropriate but contested various aspects of the taxpayer's valuation. The SCA noted that the taxpayer's valuation was fatally flawed in a number of respects and referred the matter back to SARS. For a more detailed summary of the case, see the SARS Comprehensive guide to Capital Gains Tax (Issue 9) in 8.33.12. The summary of the faulty assumptions and other errors is particularly useful.

The net asset value method involves the determination of the market value of the company's assets less its liabilities and then dividing the value by the number of shares in issue. This method of valuation would be appropriate when the value of the company is largely determined by its assets, for example, a company holding a residential property. It is, however, inappropriate when the company's value is determined by future profits, such as a service company. One of the largest assets such a company owns is goodwill which is not reflected on its balance sheet. In appropriate circumstances SARS will reduce the net asset value by any contingent dividends tax and CGT. For example, this would be appropriate if the company is to be wound up because the winding up would trigger those taxes.

When the value of the company is dependent on future profits, a valuation method that takes future income into account would be appropriate, such as the DCF method.

In ITC 1745 [2] two brothers held all the shares equally in a manufacturing company. They were advised to sell their shares to their respective family trusts. In order to avoid donations tax, the selling price had to be at market value. Their accountant used the net asset value basis in order to obtain the lowest value and arrived at a figure of R190 000 for the 500 shares held by each brother. It was argued that NAV was appropriate because neither brother held a controlling interest and there was no dividend pattern up to the time of sale. SARS valued the shares on the earnings method at R1,6 million. In the result the taxpayers could not discharge the onus and the court accepted SARS's valuation.

The deceased estate, a separate person from the deceased, will acquire the shares at the same market value under section 25(2)(a). If the executor sells the shares during winding-up, the deceased estate will have to account for any capital gain or loss. A deceased estate is entitled to an annual exclusion of R40 000 and has an inclusion rate of 40% and is taxed on the same sliding scale as a natural person. Thus, if it were on the maximum marginal rate of 45%, its effective rate of CGT would be 18% (for example, R100 capital gain × 40% × 45% = R18). Importantly, any roll-over to a surviving spouse will be nullified if the executor sells the unlisted shares during winding-up because the surviving spouse would not have 'acquired' the shares as required by section 9HA(2)(a).

Some harsh consequences can result if the company in which the deceased held the shares buys back its own shares, since this will trigger dividends tax on any portion of the consideration not paid out of the company's contributed tax capital.

​Example – Share buy-back from deceased estate​


On 28 February 2023 Jack died leaving unlisted shares having a base cost of R200 000 and a market value of R1 million.

Jack's executor disposed of the shares for R1 million to the company that issued them. The company advised the executor that the entire amount was a dividend for income tax purposes as its contributed tax capital was exhausted.

Disregard any annual exclusions, the estate duty abatement of R3,5 million and assume that both Jack and his deceased estate are on the maximum marginal rate of 45% with estate duty payable at 20%.


Jack will have to pay CGT on a capital gain of R800 000, namely, R144 000 (R800 000 × 40% × 45%). He will also be liable for estate duty of (R1 million – R144 000)[3] × 20% = R171 200. His deceased estate will have to pay dividends tax of R200 000 (R1 million × 20%). That is a total of R515 200. While the deceased estate will have a capital loss of R1 million (no proceeds by virtue of paragraph 35(3)(a)) less base cost of R1 million under section 25(2)(a)), this will be of no benefit to the estate unless it can be set off against other capital gains. In practice, the estate duty may be lower if the value of the shares can be reduced by the potential dividends tax liability. Even so, the sum of all these taxes would be substantial.

 It may be possible to structure the transaction to avoid this consequence by rather selling the shares to a pre-existing shareholder or subject to any necessary approval, to a third party. Another alternative would be for the executor to sell the shares to a subsidiary of the holding company, but section 48 of the Companies Act 71 of 2008 needs to be borne in mind, since it limits the number of shares subsidiaries of a holding company can acquire to 10%.

It frequently happens that the deceased estate will dispose of both shares and a loan account and the question arises how the purchase price is to be allocated between these two assets when the proceeds are insufficient to cover the loan account. This was the situation in ITC 1345 in which Friedman J stated the following: [4]

'The agreement of sale in this case was an agreement for the sale of both the shares and the loan account. There was no division in the agreement between the price of the shares on the one hand and the price of the loan account on the other hand. Nor does the agreement provide any machinery for the determination of a price to be allocated to each. In practice, where this is so, the value or share of the purchase price which is regarded as representing the loan account is generally an amount equivalent to the book value of that loan account, the balance being allocated to the shares; but I am not certain whether we are entitled to take judicial notice of this practice, and for present purposes I will not do so.'

In practice, a nominal value tends to be allocated to the shares and the balance of the purchase price to the loan account. For the deceased person, a capital loss would be generated on disposal of the loan account under section 9HA(1) but it will not be clogged under paragraph 39 of the Eighth Schedule, since the deceased estate and the deceased are not connected persons in relation to each other. The definition of 'connected person' in section 1(1) does not prescribe any connection in relation to a deceased estate, unlike the Value-Added Tax Act.

Estate duty

Generally, if the executor disposes of assets during the winding-up of the estate, it is the price realised by the sale that must be brought to account for estate duty purposes under section 5(1)(a) of the Estate Duty Act. However, there is an exception to this rule in section 5(1)(f)bis, which provides that unlisted shares must be valued at the date of death, subject to a number of conditions such as ignoring any restrictions on the transferability of the shares and any prescribed valuation methods.

In ITC 1301 Watermeyer J stated the following on the meaning of 'value' in section 5(1)(f)bis: [5]

'The value for estate duty purposes to be placed upon a share in a company not quoted on any stock exchange is, in terms of the first portion of para(f)(bis), the value of such share in the hands of the deceased at the date of his death. This I take to mean the true or intrinsic value of the deceased's share at the time of his death.'

An interesting question arises as to how to disclose a share buy-back in the liquidation and distribution account, particularly because from an income tax point of view, the consideration is artificially split between a dividend and a return of capital. Thus, should one show the price realised for the shares including the dividend portion, with the dividends tax as a liability? Alternatively, should the return of capital element be reflected as the price realised with the dividend portion being reflected as income and the dividends tax as an expense in the income and expenditure account?

Neither the Estate Duty Act nor the Administration of Estates Act 66 of 1965 and its regulations define 'income'. The word 'income' should therefore bear its ordinary meaning as applied to the subject matter with regard to which it is used.[6]

In my view, the classification of a portion of the sale consideration as a dividend is an artificial income tax prescript which cannot be used to interpret the meaning of 'income' in the Administration of Estates Act or the Estate Duty Act.

A similar situation to a share buy-back arose in the United Kingdom case of Inland Revenue Commissioners v George Burrell. [7] In that case the taxpayer had received a distribution from a company in voluntary liquidation and the court held that although the amount came out of the company's undistributed profits, it was not income in the hands of the shareholder:

'This argument is to my mind incomplete and defective in assuming that what is of the nature of income in the hands of the company is also prima facie of the nature of income in the hands of the shareholder. I do not think that there is any presumption of the kind. The character in which any distribution by the company amongst its shareholders reaches their hands depends entirely on the circumstances in which the distribution is made. In the liquidation of a limited company the distribution of the surplus assets of the company is almost necessarily of a final and non-recurrent character, and reaches the hands of the shareholders quite irrespective of the sources from which the assets have accrued to the company.'

For estate duty purposes, under a share buy-back the amount received by the shareholder will be of a capital nature in the hands of a long-term investor as it is also a once-off and final distribution even if it is treated as a dividend for income tax purposes.

Therefore, the gross consideration for the shares should be shown under the movable assets section of the L&D account, with the dividends tax as a liability.

Section 4 of the Estate Duty Act provides for various deductions in arriving at the net value of an estate for estate duty purposes. Section 4(b) allows a deduction for

'all debts due by the deceased to persons ordinarily resident within the Republic … which it is proved to the satisfaction of the Commissioner have been discharged from property included in the estate'.

Given that the dividends tax arose from the sale of the shares by the executor to the company, the dividends tax is not a debt of the deceased but rather of the deceased estate. It would therefore not qualify as a deduction under section 4(b). At best it may be possible to take it into account when valuing the shares on the date of death.

Could the dividends tax be claimed as a cost of administering or liquidating the estate under section 4(c)? The opening words of section 4 state that the deductions in the section must be made from the total value of all property included in the net value of the estate. Given that it is not the realisation value that is included in the estate but the value on date of death under section 5(1)(f)bis, it would seem that the dividends tax would not qualify under section 4(c). On a purposive approach to interpretation, it would not be a sensible or businesslike result to reduce the value of the shares on date of death by the dividends tax and then also allow the dividends tax as a deduction under section 4(c), since this would amount to a double reduction in the net value of the estate.


When a person dies holding unlisted shares, there will potentially be CGT and estate duty consequences based on the market value of the shares at the date of death. The estate duty value may not be reduced even if the shares are subsequently disposed of by the estate for a lower value. The buy-back of shares from the deceased estate is best avoided because of the imposition of dividends tax.

This article was first published in ASA September 2023

[1] 2016 (2) SA 608 (SCA), 78 SATC 86.

[2] (2002) 65 SATC 181 (EC).

[3] The CGT is a debt of the deceased qualifying for deduction from the net value of the estate under section 4(b) of the Estate Duty Act.

[4] (1981) 44 SATC 25(N) at 29.

[5] (1977) 42 SATC 79(C) at 83.

[6] EA Kellaway Principles of Legal Interpretation of Statutes, Contracts and Wills (1995) Butterworths, South Africa Series. See also LC Steyn Die Uitleg van Wette 5 ed (1981) Juta and Company (Pty) Ltd at 4 to 7.

[7] [1924] 2 KB 52.​​​​​​​​​​​​​​​



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