Offshore curveballs

PLANNING FOR IMPACT ON OFFSHORE ASSETS Investors can invest up to R1m in international funds without prior approval, but there are tax consequences.

Over the last few years, more South African investors have looked offshore to diversify away from country- and currency-specific risks. Investors can now invest up to R1 million annually in an international fund without prior approvals. “They can access foreign-domiciled international funds with relative ease and thereby diversify away South African political risk,” Investec Asset Management pointed out recently.

However, there are consequences. When investing in markets like the US and UK, investors expose their estates to potentially significant inheritance tax liabilities. This is because of the ‘situs assets’ principle: assets may be subject to estate or inheritance taxes in the country in which they’re regarded as being located for estate tax purposes, explains Sanlam Private Wealth’s fiduciary and tax specialist Carien Strauss.

For South Africans resident in SA, estate duty is generally payable to Sars on all their worldwide assets. However, if some assets have their situs, or deemed location, in the US or UK, for example, they may also be subject to estate or inheritance taxes in those countries, and at higher rates.

SA has double tax agreements in place with the US and UK.

An estate duty agreement between SA and the US awards the US the sole right to tax certain assets there, Strauss explains. SA estate duty is set at 20% for any amount over R3.5 million. In the US, the rate may vary between 26% and 40% for non-residents with US estates over $60 000.

In the UK, for some asset types, like shares, the agreement provides both countries may levy tax, but SA is obligated to give a credit for the UK tax paid, Strauss says. “The UK levies inheritance tax at a flat rate of 40% for UK estates over GBP 325 000, so SA can levy 20% and the UK can levy 40% on the UK shares.”

However, because the deceased resides in SA, SA’s obligated to give credit for taxes paid in the UK, limited to the amount of tax paid on the asset locally. This limits inheritance tax liability to 40% (the same for physical property). First, estimate what your offshore inheritance tax exposure is, then consider if you want to keep your current structure in place with the assets in your own name, or if it makes sense, transferring the assets to an entity or trust to avoid or minimise those taxes at death, Strauss says. “A trust in a so-called low tax jurisdictions, such as Mauritius or Guernsey, would be a potential solution where the assets concerned are significant enough to justify the cost.”

However, in the UK, every ten years the trust trustees must conduct a look through of the trust. UK situs assets are subject to a ten-year charge, Strauss says.

Recent legislation changes mean residential property in the UK is subject to UK inheritance tax, despite the property being held by a non-UK trust or company.

To benefit from an offshore trust, the trust must be administered in such a way that its tax residency is indeed offshore.

Strauss explains. “It’s important that control fully resides with the offshore trustees and that they are the ones who call the shots.”

This was first published on investor. moneyweb.co.za