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What happens when you inherit an asset from an offshore estate?

10 July 2024 Old Mutual Wealth

When a loved one who has emigrated dies, and you stand to inherit from his or her foreign estate, it’s important not to make hasty decisions regarding inherited assets. There are many options, each with tax implications, that need to be carefully assessed before deciding what to do with the property or other assets.

While South African residents don’t need to disclose any inheritance received from a foreign estate of a South African tax non-resident and selling this foreign inheritance doesn't require reporting the sale to the Financial Surveillance Department, there are still numerous intricate tax and legal factors to consider.

For example, people who have inherited offshore assets could consider either keeping or selling them through various mechanisms to streamline their estate and tax affairs.

“However, the decision on what to do with an asset should not be taken lightly and will require not only a sound legal and tax understanding of the foreign jurisdiction in which the assets are located but also knowledge of local tax laws,” says Godwin Magosha, fiduciary specialist at Old Mutual Wealth.

Using the example of the implications under South African law for a citizen and tax resident inheriting a rental property in the UK from a departed relative who had relocated some time ago, Magosha details what people need to take into consideration.

“If you (being a South African resident taxpayer) decide to keep the offshore property and rent it out, it will result in two outcomes. The property will form part of your worldwide estate and give rise to rental income. The rental income will need to be disclose to the South African Revenue Services, because of the worldwide income regime applicable to resident taxpayers. A further tax submission will have to be done in the jurisdiction where the property is located, in this case the UK.

Since the foreign property is part of your worldwide estate, it is important that you understand succession laws of the jurisdiction where the property is located. To avoid intestate succession being applied to the foreign property, a Will compliant with the rules of the jurisdiction in which the property is located should be executed.

From a South African estate planning perspective, a property inherited from a foreign estate of a non-resident, is not subject to estate duty, although capital gains tax may be payable on that property at death.

Another option to a resident beneficiary may be to sell the property as soon as it is transferred to his or her name. The proceeds can be kept offshore, invested in suitably structured products. By selling a property as soon as it is acquired, you sell it before there is a capital gains liability build up, because the market value and the base cost of the property will be almost equal. The proceeds from the sale of the property remain exempt from South African estate duty, provided you do not bring those proceeds back into South Africa. You benefit from reduced compliance obligation, like tax compliance mentioned above.

“The good news is that, as of 23 February 2022, selling an inherited foreign asset to another person doesn’t need prior written approval from the surveillance department of the South African Reserve Bank as long as this is in compliance with local tax rules," adds Magosha.

Magosha says that “there are numerous aspects to consider when dealing with various aspects of tax laws, therefore, you definitely need to get in touch with an expert”.

For example, the property can be donated to a foreign trust, as soon as the property is transferred from the foreign estate to your name, without incurring South African capital gains tax and donations tax. However, this may trigger the application of tax attribution rules leading to income tax obligations for distributions made from the foreign trust to non-resident beneficiaries.

“Because of the complicated and intricate tax and legal implications in the local and foreign jurisdictions, it's crucial for anyone dealing with this sort of situation to seek guidance from a qualified and accredited financial planner or fiduciary specialist for professional assistance,” concludes Magosha.

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