Death Taxes on Foreign Assets
Do you own shares, property or other assets situated in the UK, USA or any other jurisdiction? Many South Africans are blissfully unaware of the fact that they may be hit with an additional 160% inheritance tax, over and above the Estate Duty payable in South Africa. Careful planning can mitigate or eliminate this additional tax. It is therefore important that you choose to work with a Financial Adviser who has the necessary skill set to provide holistic advice on your investment portfolio, whilst being acutely mindful of international tax planning.
South African Estate Duty
Many South African high net worth Individuals understand that they are liable for Estate Duty on their worldwide assets. For estates with a dutiable value below R30 million, the blanket rate of Estate Duty is 20%. In estates exceeding a dutiable value of R30 million, this rate increases to 25%.
Additional foreign inheritance tax – Situs
What is not common knowledge, is that, should any of your assets be situated in a jurisdiction other than South Africa, these assets may attract an additional inheritance tax (situs tax). Many countries will levy such inheritance tax on assets that are located or deemed to be located in their country, for example:
- Property such as a holiday home if that property is located in such country;
- Listed shares if the share register is maintained in that country; or
- Shareholding in a company if the company has been incorporated in that country.
Take for example the United States and the United Kingdom, popular and accessible countries for high net worth South Africans to invest in and thus hold offshore assets. Both countries levy a form of inheritance tax on certain assets physically situated within their jurisdiction.
Under US law, a South African who does not have US citizenship and who is domiciled in South Africa is classed as a ‘non-resident alien’. Such individual is subject to a situs tax threshold of only US$ 60 000 i.e they may pay tax on assets over this value. Further, the top bracket for US inheritance tax/situs tax is 40%. South Africa’s top bracket is 25% and includes certain exemptions and spousal abatement rollover. The US system has no exemptions and no spousal abatement rollover applicable to a ‘non-resident alien’.
The impact of this is best illustrated by means of an example. Assume that you, as a South African resident, own a share portfolio made up of US shares which include Apple, Facebook, Amazon, Tesla, Microsoft valued at $1,000,000 – (R14,500,000 at an exchange rate of R14.50 to the Dollar). Assume further that your estate has already utilised the SA deductions and abatement of R3,500,000. Your estate will have to pay South African Estate Duty at 20% (R2 900 000). In addition to this, your estate would be liable for a further R2,114,100 situs tax, resulting in a total inheritance/death tax of R5,014,100. This is after the deduction of the double taxation credits that you are entitled to. Using the example above, this would mean 73% additional Estate Duty (R5,014,100 vs R2,900,000).
If it were not for the double taxation agreement that exists between SA and the US/UK, you as a South African could potentially be liable for up to 25% Estate Duty in SA and a further 40% situs tax on your US and UK assets. This could translate into 160% additional Estate Duty for those countries that do not have a double taxation agreement!
Under UK law, the threshold is higher at GBP 325,000, with the highest tax rate levied at 40%. The UK law also permits exemptions to tax on assets left to spouses and a spousal rollover benefit. However, depending on the nature and value of your UK based asset, this could present significant additional taxes that many have not planned for.
Double Taxation Agreement
South Africa only has double taxation agreements with 6 other countries for inheritance tax where credits can be applied, which includes the US and UK. However, these credits will be limited to a maximum of the South African Estate Duty payable on the asset, even though you may have paid 40% in the UK and the US. This means that instead of paying 20%-25% Estate Duty in South Africa, you will pay 40% situs tax in total on that asset.
The impact is even more significant in countries where there is no double taxation agreement.
It should also be noted that where assets are above the threshold, professionals will be required to be appointed in the jurisdiction where the asset is located to obtain probate, finalise taxes and obtain documents necessary to transfer the assets to your heirs, which will result in delays in the finalisation of your South African estate. This also carries with it additional costs that must be considered in your estate plan, especially if such offshore asset is illiquid, such as a holiday house.
Golden Visa and forced heirship
Consider all the high-net-worth South African individuals who have bought property or other assets in another country to obtain the so-called ‘Golden Visa’ not knowing that there is no double taxation agreement in place. Over and above potential tax consequences, there are additional considerations of holding assets offshore. Certain countries have forced heirship laws where one does not have freedom of testation. This may result in unintended consequences. Their wishes contained in their Wills may be ignored as they may not be able to bequeath an asset, for example to their spouse as intended, but may instead be forced to bequeath the asset to a delinquent child.
The complex tax laws, and potential forced heirship laws, will have a significant impact on planning especially if they are not provided for. It is therefore critical that your Financial Adviser is conversant in the legislation relating to the various jurisdictions in which you are invested to assist you in navigating, mitigating and in some cases eliminating situs tax.