*This content is brought to you by Brenthurst Wealth
By Sonia du Plessis*
Over the decades, more South Africans have been afforded opportunities to live and work abroad, often through country-specific initiatives, or the desire to experience different lifestyles and having the means to do so. Investing or buying assets offshore has also become less of a drag. What has, however, become more complicated is estate planning around both local and offshore assets for South African tax residents.
Assets within a deceased estate of South African tax residents may be subject to estate taxes (or an equivalent type of tax) in the jurisdiction where those assets are located or sourced.
Such taxes may be imposed over and above South African Estate Duty, subjecting those assets to double tax – once in South Africa levied on the worldwide assets of the investor, and once in the offshore jurisdiction of assets that are connected. A double taxation treaty may reduce the double tax burden.
It is therefore important to consult a financial advisor with expertise and experience in estate and tax planning to better understand especially more established, developed world economies such as the US, UK and countries in the EU. The cross-border estate duty implications should be discussed in detail, and a decision must be made on whether it should be repatriated. An advisor will also explain the importance of why it is important that the inheritance is invested in accordance with a beneficiary’s risk profile and investment goals.
So, assuming you do invest offshore or own property outside SA, what are the tax implications upon your death?
In South Africa, Estate Duty is levied under the Estate Duty Act on the dutiable amount of the estate of an individual at the time of death, at a rate of 20% on the first R30 million of the dutiable amount and 25% on any excess.
The estate of an individual consists of all property that the deceased was competent to dispose of for his/her own benefit, or for the benefit of his estate. The Act currently makes provision for deeming the certain property to be part of the estate and allows for certain exclusions, deductions, and abatement of R3,5-million.
At the time of death, the market value of all assets – including offshore assets – of the individual resident is included in the property of the deceased estate. This is in accordance with the South African residence-based tax system.
An equivalent type of tax to local estate duty is levied in many other jurisdictions and is dependent upon the “situs” of the assets. The word “situs” simply refers to the source or location of the asset e.g. US or UK.
In the US it is known as “estate taxes” and the UK as “inheritance tax”. It is likely that other jurisdictions may also impose an equivalent type of tax to Estate Duty (which is applicable in South Africa) in the event of death, and investors are encouraged to seek professional legal and tax advice in that regard.
In determining the source of assets, the domestic tax laws of the relevant tax jurisdiction should be consulted. Furthermore, Estate Duty Agreements should be reviewed. South Africa has concluded an Estate Duty Agreement with the UK and the US respectively.
Such agreements may bring tax relief by granting a tax credit to the South African tax resident where assets in the event of death have already been taxed elsewhere.
As South Africa taxes the value of the dutiable estate at 20%, local tax authorities will only grant a tax credit to the extent that double tax has been imposed. Should another jurisdiction impose a tax in excess of that, the ‘excess’ tax remains applicable in the respective foreign jurisdiction.
The current inheritance tax rate in the UK is 40% and to a maximum of 40% in the US, subject to certain limits. The current thresholds are £325, 000 and $60,000 in the UK and US respectively, but are subject to change. Different rules may also apply to US or UK residents, or their domicile status. So, it is imperative to be updated with the rules applicable to your specific situation and inform any changes to your resident status or asset pool to your financial advisor.
If you are in fortunate position to inherit money or assets offshore, what exchange control regulations would apply?*
Exchange control regulations 6 and 7 apply to any form of receipt of funds or other assets offshore, whether it relates to capital growth or income. Funds must be repatriated to South Africa within a period of 30 days if the recipient/heir does not intend to notify the SARB of the assets.
ACQUISITION BY THE TREASURY OF FOREIGN CURRENCY
- (1) Every person resident in the Republic who becomes entitled to sell or to procure the sale of any foreign currency, shall within thirty days after becoming so entitled, make or cause to be made, a declaration in writing of such foreign currency to the Treasury or to an authorised dealer.
DECLARATION OF FOREIGN ASSETS AND LIABILITIES
- (1) Every person resident in the Republic who is, or becomes, entitled to sell or to procure the sale of any foreign asset, shall within thirty days after becoming so entitled, make or cause to be made, a declaration in writing in the form prescribed by the Treasury of such foreign asset to the Treasury or to an authorised dealer. Such declaration shall state when and how such foreign asset was acquired, where it is held and whether and to what extent it is held in cover for or in respect of any foreign liability.
Accordingly, if a beneficiary wishes to retain the asset offshore, he/she must declare the inheritance to the South African Reserve Bank (SARB) via an authorised dealer (a bank) within 30 days and does not need to bring the assets back to South Africa unless the SARB subsequently instructs them to do so.
How much does the declaration cost?
Financial advisors, like Brenthurst Wealth, can assist with such an application. The cost differs depending on the service provider/bank used and whether or not the declaration is made within the 30-day period.
The approximate cost of the application made is currently R3,000 (excluding VAT).
Please note that the service provider or any other intermediary will not be able to assist in late declarations – only banks can assist with late declarations and in such instances, investors should refer the matter to their own bank.
While the world is experiencing an unprecedented time of turmoil and uncertainty, it may the ideal time to review all current investments and financial planning instruments. Read more here: Investment Planning.
*Additional information source: Investec
- Sonia is head of the Brenthurst Wealth Stellenbosch office. She is a Certified Financial Planner® and won the inaugural title of Top Financial Advisor in SA at the 2019 Intellidex Top Private Banks and Wealth Manager awards. Before joining Brenthurst she worked at ABSA Private Bank and Magnus Heystek International. She holds a B.Com degree from the University of the Free State.