Tax trap for South Africans taking money out of the country

South Africans investing offshore may face an unexpected tax bill upon death, as certain foreign countries tax assets held within their borders even if the investor never lived there.

This is feedback from Investec’s cross-border tax and fiduciary advisers, Angelique Stronkhorst and Johanci De Castro Lobo.

Offshore investments have become increasingly common among South Africans looking to diversify their wealth, access global markets and reduce their exposure to the local economy.

These investments can include shares in United States-listed companies, overseas property, and international investment portfolios.

However, investors often focus on returns, currency movements and income tax while overlooking what happens to their offshore assets after death.

For South Africans who are ordinary resident in the country, the South African Revenue Service (SARS) applies estate duty to their worldwide estate when they die.

Estate duty is charged at 20% on the first R30 million of a dutiable estate and 25% on the portion above R30 million.

However, there are several ways to reduce or defer estate duty.

Each estate receives an abatement of R3.5 million. For married couples, unused portions of the spouse’s abatement can generally be transferred to the surviving spouse.

This can increase the available abatement to R7 million. Assets left to a surviving spouse can also qualify for an estate duty deduction, which can mean little or no estate duty is payable when the first spouse dies.

The tax is not necessarily eliminated. Instead, the liability may be deferred until the surviving spouse later dies or disposes of the assets.

South Africans can also make annual donations of up to R150,000 without triggering donations tax.

Over time, regular gifting can reduce the size of an estate, particularly when the gifted assets appreciate in value.

Retirement funds can provide another form of estate planning relief, as approved retirement benefits generally do not form part of the dutiable estate.

Trusts can also be used to move future growth outside an individual’s personal estate, although they require careful structuring and administration.

The challenge for South Africans who invest offshore

The challenge for offshore investors, Stronkhorst and De Castro Lobo explained, is that South African estate duty may only be part of the tax picture.

Some countries impose estate, inheritance or succession taxes based on where an asset is located. This is commonly referred to as situs tax.

This means that the owner’s residence may be irrelevant when determining whether a foreign death tax applies.

For example, shares listed in the United States may be treated as United States situs assets.

Meanwhile, property located in the United Kingdom may fall within that country’s inheritance tax rules.

Certain assets in Ireland may be subject to Irish Capital Acquisitions Tax, while assets situated in France may be subject to French succession taxes.

This means a South African investor may be exposed to a foreign death tax without ever having lived in that country.

A South African who owns United States-listed shares through an offshore investment portfolio could, for example, potentially face United States estate tax on those holdings.

Stronkhorst and De Castro Lobo said investors should not assume that a product that is tax-efficient during their lifetime will automatically be efficient from an estate duty perspective.

Investment wrappers can provide benefits for income tax, capital gains tax or administration, but they do not remove the underlying investment from an individual’s estate.

The value of the investment can still be included in the estate duty calculation. This makes it important to consider taxes separately rather than assuming that a single tax-efficient structure solves every estate planning issue.

Stronkhorst De Castro Lobo added that future growth can be particularly important when planning an estate.

An estate valued at R20 million today could become substantially larger over the next two decades.

A properly structured trust can hold assets outside the founder’s personal estate, allowing future growth to occur outside the estate for estate duty purposes.

However, trusts are subject to South Africa’s anti-avoidance rules and require ongoing administration.

Regular gifting can also reduce the value of an estate over time.

An annual donation of R150,000 may seem modest, but repeated over 10, 20, or 30 years, it can deplete significant assets and future growth from an individual’s estate.

How appropriate each of these strategies is depends on the individual’s circumstances and the assets involved.