Death is universally acknowledged as the terminal point for every living thing. It is an inevitable circumstance that brings sorrow to everyone directly or indirectly affected by the bereavement. Among the Yoruba ethnic group of West Africa, there is a popular saying "awa ye ma ku osi" meaning "no one born into the world will live forever". Given the inevitability of death, it becomes essential for everyone to be intentional about how their affairs will be managed after their demise. Equally important is the implementation of the deceased's will, as it can substantially impact its executors and beneficiaries who must navigate the challenges of estate administration and taxation.
In this article, we will delve into the intricacies of the Nigerian tax system applicable to estate administration and how the stakeholders can manage their tax affairs.
- Taxation of Estates in Nigeria
The taxation of estates in Nigeria involves a complex set of laws and regulations a relating to income tax, capital gains tax, and stamp duties.
The Personal Income Tax Act (PITA) is the legal basis for the taxation of income arising from estates, their executors and beneficiaries. This income taxed includes the gains or profits derived from any trade, business, profession, vocation, or employment. The annual income of an estate is subject to income tax after deducting the authorized expenses and fixed annuities. The balance can be allocated among the beneficiaries based on the provisions of the will, where the deceased had one, or as agreed by the administrators, if he died intestate. Once allocated, this income is treated as taxable income in the hands of the beneficiaries. In instances where the executors have discretionary powers to make payments to beneficiaries, these payments are considered taxable income for the beneficiaries. Any remaining income after allocation is assessed and taxed in the name of the executor. These provisions aim to ensure proper accountability for estate income and the payment of appropriate taxes to the government on an annual basis. It is crucial to account for withholding tax, which is an advance payment of income tax. Withholding tax is a tax credit which reduces the overall tax payable at year-end. However, complications may arise due to improper documentation of the withholding tax beneficiary. If the estate is designated as the beneficiary, the credit will only be applicable to offset estate taxes and not the income tax of the individual beneficiaries.
In addition to income, the deceased may have assets that the executors/administrators may decide to dispose of. Based on Section 8 of the Capital Gains Tax (CGT) Act, assets of the estate that are disposed of upon the demise of the deceased, are treated as if they were disposed of on the day of his death. These assets are then deemed to be acquired by the executors of the estate under his will, or his personal representatives, if he died without a will, or the beneficiaries of his estate. The specific value at which the assets are deemed to be acquired depends on two different scenarios:
- If the asset was last disposed of at a known arm's length transaction, the consideration for that transaction is taken as the acquisition value.
- If there is no ascertainable consideration for the last disposal, the market value of the asset at the date of his death is considered as the acquisition value.
The gains that arise from this deemed disposal and acquisition, as described in the mentioned circumstances, are exempt from CGT under the relevant legislation. In relation to a property that forms part of the deceased's estate, the executors or administrators are treated as a unique and continuous body separate from individuals who may hold those positions at different times. This body is treated as having the deceased's residence and domicile at the date of death for the purposes of the CGT Act.
When a person acquires an asset as a legatee (the recipient of an asset as per the deceased person's will or intestacy laws), the administrators or executors are not liable for any chargeable gain. Instead, the legatee is treated as if he/she directly acquired the asset from the personal representatives. Since Nigeria does not have capital acquisition taxes, the legatee can enjoy the acquisition tax-free. It is important to note that the provisions regarding assets that a deceased could dispose of are subject to certain conditions. For instance, assumptions are made that all the assets are situated in Nigeria and, if the deceased was not domiciled in Nigeria, he/she is treated as domiciled in Nigeria. Furthermore, if within two years after the death of the deceased, any dispositions of the deceased person's property are varied through a family arrangement or similar instrument, these variations are treated as if they were made by the deceased. Such variations made by the deed or instrument do not constitute a separate disposition for the purposes of the CGT Act. Additionally, where the estate disposes of an asset, incorporeal or not (including shares and digital assets such as cryptocurrencies), to an external party for a consideration, CGT will be imposed on the capital gains received.
Any contractual agreement made by the estate or the beneficiaries regarding the estate will be subject to stamp duties, and the responsible party in each contract will be obliged to pay the duty. For example, where the estate is a tenant under a lease contract, the estate will be responsible for the stamp duty. However, where the estate is the landlord, the tenant would be responsible to pay the stamp duty. In the same manner, where an estate purchases a property, the estate would be responsible for the stamp duty payment. On the other hand, if the estate disposes of a property, the purchaser will be liable for stamp duty.
- Compliance requirements by estates in Nigeria
It is crucial that estates comply with the relevant pieces of tax legislation in Nigeria. We have highlighted below, some of the major compliance requirements:
- Notifying the tax authorities of the death of the individual and the relevant parties that will be managing the estate. This is a very crucial step as it will aid the tax authorities in closing out the relevant assessment with respect to the deceased. The executor of the estate will also be responsible for filing the final returns of the deceased where applicable.
- Filing of tax returns: The estate is obligated to file annual tax returns with the appropriate tax authority, disclosing its income, expenses, and any tax liabilities within 90 days in each calendar year. Where the estate has employees, it will be required to file employee annual returns on behalf of such employees before the 31st day of January of each year. There may be other filing or reporting obligations incurred by the estate pending the final distribution of its assets.
- Maintenance of proper accounting and legal records: The executor of an estate is required to maintain accurate accounting and legal records, preparing accounts that cover the income from all sources of the settlement, trust, or estate for successive periods up to the 31st day of December of each year and until the final distribution of assets. These records are important for transparency and accountability, thereby enabling the executor track and document the estate's income from various sources.
- Penalties for non-compliance: Failure to comply with tax obligations, such as filing tax returns or paying taxes, may result in penalties, interests, or even legal actions as prescribed in the relevant legislation.
Conclusion
In Nigeria, estates are subject to income tax, capital gains tax, and stamp duties. The allocation of income among beneficiaries, proper documentation of withholding tax, and considerations of disposal of assets are among the key provisions that govern estate taxation. The tax system aims to promote transparency, accountability, and revenue generation for the government.
In comparing the tax system in Nigeria with other jurisdictions, we find that there are similarities and differences in their approaches to estate taxation. Each country recognizes the significance of taxing estates as a means of generating revenue and promoting economic efficiency. However, there are differences in thresholds, rates, and reliefs which impact the overall tax burden on estates.
As tax laws are subject to change, staying up-to-date with the latest regulations and seeking professional advice is crucial for estate planners and beneficiaries in Nigeria. While death remains an inevitable reality, adhering to the tax laws and engaging in strategic tax planning, can help navigate the complexities of estate taxation to ensure the efficient transfer of wealth and the realization of the deceased's wishes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
