Investing in Offshore - beware of international estate duties!

Coreen van der Merwe, Managing Director at Sovereign Trust SA.

More than ever, South Africans are looking into investing offshore - with protection from the weakening Rand and the need for some buffering against an increasingly unstable economic climate being among the major drawcards. Investing overseas also offers access to investment options and structures that are not available on the domestic market.

However, investing offshore is not without risks and the local investor should avail himself of all the facts before making a decision. As an example, South African investors with offshore assets could find themselves liable for unexpected estate duties in the event that their portfolios are not correctly structured.

When considering an offshore portfolio, it’s crucial to work with a trusted, reputable financial advisor. A good advisor will draw up – and discuss – a long-term investment strategy, explain the pros and cons of the suggested investment structures and how the investment will be made, and also thoroughly investigate the institution that will receive the investment, before making recommendations.

International estate taxes

The USA and the UK both tax ‘situs’ (Latin for position or site) assets on the death of an investor even if the owner of these assets is not a citizen of that country. This tax can be as much as 40% of the market value of situs shares in those countries.

The USA levies estate taxes on non-citizens, which can be up to 40% of the combined value of the ‘situs’ assets in the country if the value of the assets exceeds $60 000. The situation in the UK is similar. Taxation, on the death of a non-citizen, is 40% of the value of the ‘situs’ assets when their combined value exceeds £325 000 (which is known as the ‘zero band’ rate).

According to South African law, estate tax on all assets is currently 20%, regardless of whether these assets are held in South Africa or in another country, and the gross value of the estate is taken into account when doing the calculations.

Our laws allow for a reduction of R3.5-million from estate duty and a further R3.5-million may be transferred from the deceased estate into the surviving spouse’s asset portfolio which in effect means a tax reduction of R7-million; provided that the entire estate is bequeathed to the surviving spouse.

The UK has a similar ruling, subject to certain requirements and limitations, but the USA does not grant any exemption if the surviving spouse is not a USA citizen.
The USA, UK and South Africa have signed double taxation agreements that prevent taxation of the same assets (although in such cases, the estate tax is charged at the higher rate) by both countries, i.e. the country where the asset is based and the country where the owner is tax resident.

To soften the tax blow to an extent, South Africa’s Inland Revenue Service does allow a credit for the payment of taxes levied by the USA and UK. The value of this credit is determined by the prevailing estate duty tax rate in South Africa which is currently 20%.

The solution

To avoid incurring unexpected and unnecessary taxes arising on death, South African investors who are looking offshore should always consult an accredited estate planner and an international tax law expert before making decisions. These expert financial consultants can help an investor to grow their assets optimally so that their heirs can benefit from proper financial and tax planning in the future.

Right now, Sovereign Trust (SA) would advise South Africans to consider investing in a Guernsey-based pension plan as Guernsey does not tax most Guernsey based pension plans. In this instance, the investment is made in the name of the trustee of the pension plan rather than that of the investor and, usually, this trustee will then appoint a financial advisor chosen by the investor, to liaise and advise on its behalf.

There are a number of Guernsey-based trust companies that can implement international pension plans. But again, when an offshore investor is choosing a trust company, it is important to make sure that the company is licenced, has a good reputation in the industry and, preferably, has local representation to facilitate good communication. Having a local office usually means that the Guernsey based trustees know and understand South African tax laws.

Also, if a Guernsey based pension plan is well-structured, it is possible to avoid complicated loan agreements, donations tax and unnecessary estate duty that would usually apply when investing through ‘traditional’ foreign trusts.