Stories abound of South Africans being hit with 40% tax on their UK and US portfolios.
“It’s a situation that is entirely avoidable if you do the right planning,” says Pierre Cloete, CEO of specialist offshore advisor International Wealth & Prosperity (IWP). “The benefits of offshore investing may be well known, but what is less understood are the pitfalls of investing offshore when the investor passes away. Bad planning can dramatically reduce the distributable benefit to the beneficiaries named in the will.”
This assumes there is a will that covers all eventualities.
Here are some of the hazards of offshore investing that can arise in the event that the investor passes away:
- Make sure you have a clearly written will: The first step, says Cloete, is to ensure that the investor has a will that is written in clear and specific terms. Preparing a single worldwide will may suffice where the testator’s (person making out a will) overseas assets are relatively small. But things can get complicated in cases where there is a joint account owned by both spouses. To avoid disputes later, the will should specify that the surviving spouse inherits the account, rather than other members of the family.
- You may be subject to taxes in multiple jurisdictions: ‘Death taxes’ are applicable not just in SA, but also the UK and US for South Africans owning shares in those jurisdictions. The estate duty applicable on South Africans when they die is 20% of their worldwide assets. The UK inheritance tax is 40% on applicable UK-based assets above £325 000 (R6.4 million), and estate duty of 40% is payable on applicable US assets valued above $60 000 (R860 000). Though there are double taxation agreements with both the US and UK, this may not get you completely off the hook when it comes to settling estates taxes.
- European assets: Assets located in the European Union, but outside of the UK, Ireland and Denmark, are subject to the European Succession Regulation which gives primacy to the succession laws of their country on which they are a citizen.
- Executors acting for deceased South African residents with offshore assets may need a grant of representation from a court or local advocate: This can be a lengthy and expensive process, and can delay the winding up of the estate. This is called ‘probate’, which is the court’s authority given to an executor dealing with the deceased person’s estate. The document issued by the court is called a grant of representation. This document is usually required by the bank, company or custodian holding the assets to show that the correct person has the court’s authority to administer a deceased person’s estate. Executors of South African residents with assets abroad will need to apply to the courts in the country where the assets are for this grant of representation and may require the assistance of an advocate in that country. This can be a time consuming, expensive and very laborious exercise in terms of original documentary evidence required. Winding up the South African estate can be delayed, with the ultimate beneficiaries waiting a long time to receive the proceeds.
- Tax reporting can be complicated, as you have income tax, situs and estate duty implications. These can get quite involved, depending on each investor’s personal circumstances, and Cloete advises contacting a specialist for guidance.
“Investing offshore, particularly in low-cost passive funds, has become the most acceptable way for South Africans to diversify their portfolios and protect their wealth,” says Cloete. “Any responsible investor should be taking maximum advantage of the opportunities abroad. For example, the S&P 500 index outpaced the JSE Top 40 by a factor of 10 to one over the last decade.
“That said, there are quite a few pitfalls that have to be negotiated with offshore assets, to avoid the kind of unnecessary taxes and delays that can result from poor planning.”
To see how International Wealth & Prosperity (IWP) can assist you in building your global wealth, go to iwpsa.com. Please note that different rules apply to different jurisdictions and investors should seek advice tailored to their unique requirements from IWP.
Brought to you by International Wealth & Prosperity (IWP).
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