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If the issue of death taxes on offshore assets is not properly planned for, it could substantially eat away at your legacy or any inheritance you may want to leave behind for your loved ones. However, if you receive the appropriate advice there are ways to mitigate death taxes and ease the burden on your family once you are no longer around.
These death taxes are often referred to as ‘situs’ taxes. Situs is Latin for position or site. Essentially, a country may levy inheritance or gift taxes on the transfer of an asset if the asset is situated or deemed to be situated in a certain jurisdiction. Situs assets are usually comprised, among others, of equity, immovable property, or companies incorporated in a jurisdiction.
Estate duty is a situs tax and is levied on South African tax residents (on a worldwide basis) or on non-residents (on their SA-situated assets) at a rate of 20%/25%. Many countries levy situs taxes, including Spain, France, the US, the UK, Greece, Ireland and many others. Often the situs taxes in these jurisdictions are substantially higher than SA estate duty, and even more daunting, a credit may not readily be available for situs taxes paid offshore.
The jurisdictions we see our clients exposed to the most are the UK and the US, and both have steep death taxes.
In the UK, a 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 is also 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 extremely low for non-residents, 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.
Thankfully, South Africa has a double death duty agreement with both the UK and the US, which means that you won’t be paying death taxes twice on the same asset, as your executor could apply for a credit in SA for the situs taxes paid offshore.
The UK and the US are two of the few countries that have double death duty agreements with South Africa. If you have situs assets in Spain for example, you may not be so fortunate. Situs tax in Spain is levied at both a regional and national level, and the effective rate can be as high as 81.6%! In addition, as there is no death duty agreement in place, South Africa may levy further taxes on the same asset.
Situs taxes can be mitigated by assessing your investment strategy or in some instances, utilising an appropriate structure. However, deciding how to suitably mitigate situs taxes for your particular circumstances must be assessed and appropriate tax advice must be obtained.
For example, investing in unitised vehicles or endowment wrappers may act as blockers for situs taxes. A trust may also act as a blocker for situs taxes, however, this is not always the case. For example, the UK has introduced legislation to circumvent this. As a trust does not die, the UK introduced the 10-year anniversary charge on trusts. Essentially, every 10 years since the inception of the trust, the situs assets that exceed £325,000 would be taxed at a flat rate of 6%. Reporting to the HMRC would be required.
When it comes to investing offshore, the tax tail should not wag the investment dog but tax should be a consideration. As the world continues to evolve into a global village, it’s important to take into account the cross-border tax implications of both living and dying as a global citizen.