Overseas assets? Plan properly to avoid SA estate duty shock

South Africans are increasingly building up estates offshore. The question is, what are the estate duty consequences in SA when they die?

Consider this scenario. Mr A dies. He has a flat in the UK worth R5m and a bank account worth R500,000. His estate in SA is only worth R2m. He leaves everything to his children.

What are the estate duty consequences in

SA? It is important to remember that SA taxes residents on their worldwide assets. The same applies for estate duty.

This means Mr A’s estate in SA will have to pay estate duty on the UK assets. The assets could be subject to duty in the UK as well.

In such a case, the duty payable in the UK will be a credit against the duty to be paid in SA on those assets. In this example, because Mr A’s estate is below the inheritance tax abatement in the UK (£325,000, about R5.8m) there will be no duty in the UK.

However, that means the assets will be fully subject to estate duty in SA. Taking the UK assets into account, estate duty would have to be paid on assets worth R7.5m.

In SA there is an abatement of R3.5m before estate duty is paid, so estate duty would have to be paid on R4m.

This means that, ignoring deductions like executor’s fees, debts and funeral expenses, at the estate duty rate of 20%, this would amount to R800,000 in estate duty. That can come as quite a shock to many South Africans.

It is important to understand that just because you have assets overseas, and an overseas will, it does not mean you won’t have an estate duty problem in SA. You need to plan and make provision for this. This can be done in a number of ways.

First, if assets are bequeathed to a spouse, then in terms of paragraph 4q of the Estate Duty Act, such assets will be deductible from the dutiable estate.

Second, it is important to have liquidity in the deceased estate to be able to pay this duty.

The easiest way to do this is by way of an insurance policy. However, remember that such an insurance policy will also be subject to estate duty, and this needs to be factored in to the cover taken.

In addition, if such a policy pays in to the estate, the executor will charge fees on the policy.

You should negotiate with your executor not to charge fees on this policy, as the cash and liquidity it creates will assist them in winding up the estate quicker.

This would need to be written into the will. You could also consider taking out a foreign policy, to ensure you match the growth of your offshore assets (and the resulting estate duty increase as they grow), in a foreign currency.

Finally, make sure your wills overseas and in SA work in unison. They should state clearly that the South African will only applies to South African assets, and the overseas will to foreign assets.

It is important to be aware that just because you have assets overseas, that does not mean they won’t be estate dutiable in SA. You should take steps to mitigate this by ensuring proper planning, a carefully structured will(s) and possibly even a life policy.

Otherwise you run the risk of having a major estate duty shock in addition to the shock of losing a loved one.

Joffe is the head of legal services at Discovery Life