Understanding the Tax Implications of investing internationally
Investing some of your wealth internationally is becoming increasingly attractive and to a large extent non- negotiable from a diversification point of view. However, it’s important to understand the small print to make sure your assets are protected and that there aren’t any unintended consequences for you and your dependants.
Through this series of articles, we highlight the various aspects of ensuring that your international investments comply with the relevant legislative and regulatory framework, including tax implications, suitable structures, and whether to have a separate will or not.
ESTATE DUTY FOR SOUTH AFRICAN RESIDENTS
On death, South African residents are liable for estate duty based on their worldwide assets. Estate duty is currently levied at a rate of 20% in the case of an estate less than R30 million, and at a rate of 25% on the value above R30 million.
WHAT IS SITUS TAX?
The term situs is a Latin word meaning “situation, position or site” and fundamental in determining whether an asset will fall within the scope of estate or inheritance taxes in a particular jurisdiction and also important for purposes of applying International Estate Tax Treaties. For example, the situs of immovable property is the place or country where the property is situated, or in the case of a company, where incorporated or where the share register is maintained.
Both the UK and the US levies an estate duty on certain situs assets, i.e. certain assets that are physically situated within their jurisdiction. In the UK this is known as Inheritance Tax and in the US it’s called Estate Tax. Collectively, they are known as situs taxes. This is important to note if you have assets in either country.
WHAT TAXES DO I PAY UNDER SITUS?
In the UK, 40% situs tax will be levied on situs assets over the value of £325,000. Any amount falling below the £325,000 threshold is known as “the nil rate band” and is free from situs tax. Each individual receives this £325 000 exemption. There will be no situs tax levied on any situs assets left to a surviving spouse. In addition to this, if the situs assets are left to the spouse, which results in the £325,000 exemption not being used, the exemption will roll over to the spouse. The spouse will then have a £650 000 exemption on their death.
In the US, the threshold for situs tax is dangerously low at only $60,000. The top bracket for estate tax is 40% on US situs assets. In contrast to the UK, the US offers no spousal exemptions or rollovers unless the spouse is a US citizen.
So, on death, you will be in for 20% SA estate duty, as well as a potential 40% situs tax on your US and UK situs assets. You must be thinking: “Is that not a double tax?” You are correct, but all is not lost.
THE IMPACT OF THE SA DOUBLE ESTATE TAX TREATIES (DTT) WITH THE UK AND US
The end result is broadly that a SA resident who is subject to SA Estate Duty on his or her worldwide assets will end up paying the US Estate Tax or UK Inheritance Tax on the UK or US situs assets where the respective thresholds are exceeded and in general, will then not have an estate duty lability in SA.
South Africans will be able to claim a credit in SA for the situs taxes paid in the UK and US. However, the credits will be limited to a maximum of the 20% SA estate duty payable on the asset, even though you may have paid 40% in the US and UK. This essentially means that instead of paying 20% SA estate duty, you will pay 40% situs tax.
It is important to note that a credit is not automatically applied. It is your executor’s responsibility to ensure the credit is claimed and applied. If this is not done, you may end up paying both 20% SA estate duty and 40% situs tax. It is important to ensure that the executor of your estate is aware of the situs applicable to your assets. Failing to pay the necessary taxes may result in your executor becoming personally liable for the taxes and severe penalties for your executor and heirs.
SA resident clients who are neither resident nor domiciled in the UK or US with situs assets at time of death will have UK Inheritance Tax and/or US Estate Tax liabilities where the assets exceed the respective thresholds.
Contact a Centric Wealth Advisor for more information.