The tax levied in South Africa on deceased estates is commonly known as estate duty. Perhaps not so commonly known is that the tax levied in the United Kingdom (UK) on deceased estates is called inheritance tax and that the tax levied in the United States (US) on deceased estates is called federal estate tax. These taxes are generally levied in the UK and US on assets that are classified as UK or US situs assets, even when these situs assets are owned by non-residents.
Which assets are subject to UK and US situs taxes?
‘Situs’ is Latin for ‘position’ or ‘site’. The situs of an asset is therefore generally the place where an asset is deemed to be located for legal purposes, for example:
- the location of immovable property;
- the place where a share register is maintained; or
- where a company has been incorporated.
The most important thing is to get specialist advice on your foreign assets
When you own UK and/or US assets, you potentially become liable for taxes in these jurisdictions, including income tax, capital gains tax and estate tax. These taxes can have a significant impact on your long-term outcomes, which is why it is critical to get expert advice about the different ways to acquire foreign assets and structuring your international wealth.
Double-taxation agreements (DTAs) will determine your exact tax liability
Because South Africa has a residence-based system of taxation, South African residents are subject to income tax and estate duty on their worldwide assets. Depending on the assets you own and how you acquired them, you may be subject to taxes in the UK and/or US in addition to South Africa. This is where DTAs come into play.
The purpose of DTAs is to provide relief to taxpayers who own assets in different jurisdictions, ie to avoid as far as possible a scenario where taxpayers pay tax twice on the same asset (in different countries). Generally, the country in which the assets are located have taxing rights. However, the terms of the DTA agreements will determine the exact liability.
South Africa has DTAs with both the UK and the US. Depending on the exact terms of the agreement, you may be able to deduct the tax payment made in the US and/or UK against any tax payable in South Africa.
The table below shows the various types of assets that will be subject to estate taxes in South Africa, the UK and the US as part of deceased estates of persons who are:
- resident in South Africa; and
- non-resident and non-domiciled in the UK and/or non-resident in and not a citizen of the US at the time of their death; and
- who hold assets in either the UK or US.
How to reduce your UK or US tax liability
There are various ways to gain exposure to UK and US assets with a reduced tax liability
- Obtain exposure to US and UK investment markets by investing in funds (CISs and/or ETFs) that are registered outside the UK and US.
- Nedgroup Investments, for example, offers investors CIS that are structured as Undertakings for Collective Investment in Transferable Securities (UCITS) and Irish-domiciled. As a result, investors can obtain exposure to US and UK situs assets via these funds without becoming liable for the inherent US and UK situs taxes.
- Restrict the value of any investments located in the UK and US to the estate thresholds or nil rate bands.
The current thresholds are:
- UK – £325 000
- US – $60 000
- Hold UK-registered shares via a non-UK holding company and US situs assets (both securities and real estate) via a non-US holding company. This is complex and requires specialist advice.
- Invest in UK-authorised unit trusts and OEICs (authorised and regulated by the Financial Conduct Authority) – these are ‘excluded assets’ and therefore fall outside the scope of inheritance tax.
- Hold UK and US situs assets via an international endowment (insurance) wrapper.
The Old Mutual International Investment Portfolio Plus (OMI IP+) offers South African-registered taxpayers (both entities and individuals) a tax-efficient solution to obtaining exposure to US and UK situs assets without triggering the associated estate taxes in the US and UK. The OMI IP+ is a non-UK or US situs asset, even if the portfolio invests in or holds UK or US assets. The investor is therefore not liable for UK or US inheritance tax charges on death.
Choosing the right option for you requires specialist expertise and advice
Considering your circumstances, please contact your wealth manager to discuss the options above in more detail. Our specialist expertise and personal advice can help you make informed decisions about your international exposure.
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.