We all know that death and taxes are unavoidable. And let’s be honest, taxes are not something anyone enjoys. As a South African, you’re familiar with taxes like income tax, interest tax, capital gains tax, and estate duty when you pass away.
But here’s something you need to know. If you own physical property or have a direct offshore share portfolio (above a certain value) at the time of your death, your estate could face an international tax bill.
In countries like the UK and the US, you’ll come across something called situs tax. It’s all about taxing assets based on where they’re located. So, if you own a house in a particular state or stocks in a specific country, that jurisdiction has the right to tax those assets, no matter where you live. This also applies to intangible assets like intellectual property or trademarks, which can be taxed in the jurisdiction where they’re registered or used.
It’s important to remember that different jurisdictions have different rules regarding situs tax. If you have assets in multiple jurisdictions, it’s wise to consult a tax professional to ensure you’re following all the applicable laws.
Here’s the deal: no one gets a free pass just because they’re not a resident of a specific country. If you own any of these assets, you’re subject to the taxes. And believe me, these taxes can be as high as 40% of the asset’s market value. With better communication between tax jurisdictions, the chances of evading taxes are decreasing.
The US and the UK are the most well-known countries where situs tax applies. In the US, non-resident estates with assets exceeding $60,000 are subject to estate taxes on a sliding scale. In the UK, estate taxes apply to estates with combined assets valued over £325,000. Similar to South Africa’s abatement and roll-over provisions, the UK has its own requirements and limitations. In the US, you may only get an exemption if your surviving spouse is a US citizen.
Now, here’s some good news. South Africa has a double taxation agreement with both the US and the UK. That means the same asset won’t be taxed in both countries, avoiding double taxation.
If you want to avoid paying situs tax on your share portfolio, consider investing within an endowment structure or a unit trust. The five-year restriction period attached to an endowment isn’t burdensome because direct offshore and share portfolios are considered higher-risk investments that should be held for at least seven to ten years. During this restriction period, you can make one surrender and one interest-free loan. Investors with higher marginal tax rates also benefit from these endowments, as they are taxed at lower rates using the five-fund approach.
Even if your share portfolio isn’t currently close to the mentioned values, keep in mind that these investments could remain active for many years, and situs tax might become applicable down the line.
If you decide to transfer your existing share portfolio into an endowment, it will have capital gains tax implications. However, it can be beneficial to take advantage of the lower market prices and the start of a new tax year. By selling your shares now, buying them within the endowment structure, and splitting the investment between the current and upcoming tax years, you might reduce your taxable capital gain.
Apart from reducing potential estate taxes upon death, this strategy also simplifies the estate settlement process, which can become lengthy due to international taxes.
My best advice is to talk to a professional financial planner and tax consultant. They can help you make well-informed decisions that suit your specific situation. Remember, it’s essential to stay on top of your taxes and plan wisely.
Original source: https://www.moneyweb.co.za/financial-advisor-views/situs-tax-why-you-should-take-note/
