SAVE ESTATE DUTY AND CAPITAL GAINS TAX THIS WAY
By Elmie de Jager
7/3/2026
Is usufruct a dirty word or the answer?
There are differing opinions on whether usufruct is worthwhile. However, if properly considered and correctly structured, it can result in substantial savings on estate duty and capital gains tax. It also offers an affordable way to transfer assets to a trust.
Usufruct works particularly well when you want to transfer assets such as property or a farm to a trust, while you still have a spouse, and where the beneficiaries are South African residents. In such a case, it is almost an obvious route to follow.
What is usufruct?
Usufruct is a right granted to someone to use an asset, enjoy it, and receive the income or “fruits” from it—without ever becoming the owner of the asset.
What is bare dominium?
The holder of the bare dominium (bare ownership) owns the asset in name but does not have the right to use, enjoy, or sell it until the usufruct ends.
It can be compared to someone who receives a pot of money but is not allowed to touch it—he may only look at it until a certain date, no matter how much he needs it.
This is also where usufruct can sometimes become a “dirty word”: when the bare dominium holder feels entitled to the asset and wants to sell it but cannot.
Practical example
There are, however, certain requirements that must be met for this strategy to work successfully. Let’s illustrate this with an example.
John (60) owns a property in his personal capacity with a market value of R35,000,000 and a base cost of R15,000,000. His main concern is estate duty.
He does not want the property to be sold to settle taxes, nor does he want to take out a large life policy that could be expensive in the long term and potentially erode his retirement savings.
He is married to Zoe (58), and they have a son, Pieter (31). The intention is for Pieter to ultimately inherit the property. If John simply bequeaths the property to Zoe, he merely shifts the estate duty problem to her estate. Pieter intends to remain in South Africa.
However, if John uses usufruct and structures it correctly, he can achieve significant tax savings. The wording in his will is critical, and the trust (John Trust) must always have South African resident beneficiaries.
In his will, he appoints the John Trust as heir to the property, subject to the condition that:
- His wife, Zoe, enjoys a lifelong usufruct over the property; and
- Thereafter, his son, Pieter, enjoys usufruct for two years.
Let’s consider the implications upon John’s death:
What the calculations mean:
Spousal deduction (section 4(q) of the Estate Duty Act):
Everything bequeathed to a spouse is exempt from estate duty.
As a result, R31,496,934 of the property’s value can be deducted for estate duty purposes.
The capital gain on this portion is also exempt because it qualifies as a rollover to the spouse.
Therefore, no capital gains tax is payable on this portion.
Only R3,503,066 is subject to estate duty—slightly above the section 4(a) abatement of R3.5 million.
R2,001,752 represents the taxable capital gain, on which applicable exclusions can be applied.
By following this method, John saves:
- R6,000,000 in estate duty on the first R30,000,000;
- R374,233.50 on the portion above R30,000,000; and
- Total estate duty saving: R6,374,233.50
The capital gains tax saving (assuming John falls within the 45% marginal tax bracket and has used his exclusions) is calculated as follows:
R31,496,934 × 57% × 40% × 45% = R3,239,685
The property is now transferred to the trust without loan account complications in terms of section 7(c) of the Income Tax Act, with a new base cost of R3,503,066 instead of R15,000,000.
If the trust eventually sells the property and has a local beneficiary, the effective capital gains tax rate will be 18% if distributed to the beneficiary. This remains more favourable than 20%–25% estate duty plus capital gains tax, which was not paid on John’s death.
In the event of Zoe’s death
Upon Zoe’s death, the following applies:
Capital gains tax does not apply to the termination of usufruct; therefore, no CGT is payable.
Only the value of Pieter’s two-year usufruct (calculated at the market value at that time) is included in her estate.
In this example, this amounts to R8,112,000.
Zoe also qualifies for the section 4(a) abatement (currently R3,500,000).
Estate duty is therefore only payable at 20% on the amount exceeding section 4(a)—in this example: R922,400.
Other applications
This principle can also be applied to shares and unit trust investments. The growth rate will naturally differ from the example’s 12% and will depend on the actual performance of the investment.
Note: The usufructuary may only benefit from income and growth but may not access the capital.
Potential drawbacks to consider
As with any planning strategy, there are risks and disadvantages to consider:
The calculations for property/farms are based on current rates (e.g. 12%), which may change in future. A reduction could diminish the tax benefit.
There is always the possibility that the spouse dies first, which could disrupt the intended structure and timing of benefits.
Alternatively, both parties may live significantly longer, reducing life expectancy assumptions while asset values increase. A long-term plan to transfer assets to a trust remains necessary.
Future debt can create complications. If usufruct is registered over a property, it cannot easily be sold to settle debt, as the usufructuary’s rights must be considered.
Lastly, property subject to usufruct cannot be used as security without the usufructuary’s consent. This can create practical challenges, particularly in environments such as farming, where ongoing production and development capital are required.
Conclusion
This method defers capital gains tax but delivers significant estate duty savings.
It also helps retain assets within the family without the need to sell them to meet tax obligations.
Usufruct is therefore not necessarily a dirty word—if properly structured and professionally implemented, it can be the solution.
Elmie de Jager is a certified financial planner at Woodland Wealth. Contact her at info@woodlandwealth.co.za.
Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.