The term ‘situs’ is frequently employed in financial and legal contexts with an assumption of universal understanding. However, do we truly grasp its significance, especially as South African residents or as global citizens? This article aims to elucidate the meaning of ‘situs’ and underscore its critical importance in determining the tax implications for your offshore assets.
Understanding Situs Tax: Taxation of Non-Resident Assets Explained
The concept of situs is crucial in determining tax liabilities for non-resident assets within a specific jurisdiction. Currently, our clients are globally dispersed, with significant asset holdings often found in the UK and the US, including listed assets, bonds, and properties. This article aims to clarify situs and situs tax, with a focus on the tax regimes applicable to non-residents in these countries. Of course, other jurisdictions also impose situs tax, and we welcome further discussions on these matters.
Situs
“Situs” denotes the specific location or position where an asset is situated for legal purposes. It dictates the jurisdiction where the asset is deemed to be located and governs the applicable laws concerning its taxation.
Situs Tax
Situs tax, also referred to as source-based taxation, levies taxes on assets based on their location rather than the taxpayer’s residence. This form of taxation typically applies to assets such as property, listed shares, and cash, contingent upon the laws governing the jurisdiction where the asset is held.
Situs tax plays a crucial role in enabling governments to generate revenue from economic activities occurring within their jurisdictions, making it significant across all regions.
This article has focused solely on the mechanics of situs tax within the jurisdictions mentioned above.
US situs tax rates for non-residents
In the United States, non-residents are subject to specific tax rates on income sourced from within the country, including various types of assets. Key considerations for US situs tax rates applicable to non-residents include:
- Property: Non-residents face a flat tax rate of 30% on gross rental income earned from property located in the US.
- Dividends and Interest: Non-residents may be subject to a 30% withholding tax on certain investment income such as dividends and interest from US sources. However, tax treaties between the US and other countries may lower this tax rate. The completion of Form W-8 BEN by the client declares their non-US status and triggers the application of any applicable Double Tax Agreement (DTA) for these US-held assets.
- Capital Gains: Generally, non-residents are not liable for US capital gains tax on the sale of personal property. However, gains from the sale of US real estate interests by non-residents are taxed under the Foreign Investment in Real Property Tax Act (FIRPTA). Buyers of US real property interests from non-residents must withhold a portion of the sale proceeds.
- Estate Tax: Non-residents are subject to US estate tax on certain assets with a US situs, such as real estate and listed shares. The exemption amount is $60,000, and any amount above this threshold is taxed on a graduated scale ranging from 18% to 40%. It’s important for South African residents to note that the difference between US estate duty (up to 40%) and SA estate duty (up to 25%) cannot be reclaimed. Executors who fail to disclose assets to the IRS may be personally liable for a number of years after the deceased’s death.
UK situs tax rates for non-residents
In the United Kingdom, non-residents may also face taxation on specific assets situated within the UK. The tax rates and regulations differ based on the type of asset and the individual’s residency status. Key considerations for UK situs tax rates applicable to non-residents include:
- Real Estate: Non-residents who own residential property in the UK are subject to Non-Resident Capital Gains Tax (NRCGT) on gains from selling UK residential property. The tax rates mirror those for UK residents, currently set at 18% for basic-rate taxpayers and 28% for higher-rate taxpayers.
- Inheritance Tax: Non-residents could be liable for UK inheritance tax on assets with a UK situs, such as real estate, listed shares, and cash. The inheritance tax rates for non-residents align with those for UK residents, featuring a standard rate of 40% on the taxable estate value exceeding the current GBP 325,000 exemption threshold. It’s noteworthy that a similar tax is applicable to offshore trusts holding UK-based assets and is assessed on a ten-year basis.
- Income Tax: Non-residents typically bear UK income tax liability solely on income sourced from within the UK. Tax rates for non-residents vary depending on the type of income, encompassing dividends, interest, rental income, and other income derived from UK sources.
Conclusion
In summary, situs and situs tax are pivotal in determining how assets owned by non-residents are treated for tax purposes in a particular jurisdiction. Understanding the situs of an asset enables tax authorities to establish its taxable connection and apply pertinent tax laws and rates accordingly. For instance, both in the US and the UK, non-residents may face taxation on specific asset types with local situs, such as real estate, listed shares, and investment income. The precise tax rates and regulations vary by jurisdiction and asset type, underscoring the importance of seeking professional tax advice to ensure compliance with applicable tax laws and regulations. Double Taxation Agreements (DTAs) are also crucial in situs tax matters, necessitating an understanding of the relevant DTA for the jurisdiction where assets are held.
Please note that any information in our posts, documents, infographics, emails etc is general information and should not be considered as providing financial advice. We therefore disclaim all liability and responsibility arising from any reliance placed on such information by any reader, client or visitor to our website. Though we make every effort to ensure the accuracy of the information provided we accept no liability for any inaccuracies.