Question

My financial advisor has told me that I could be liable for situs tax on my offshore investments. I have never heard of this before.  Is there such a thing? 

Answer

As we increasingly adopt a worldwide approach towards investing and managing our finances, we are going to encounter these interesting new terms like situs tax.

Situs tax Is the tax that is levied in the country where the asset is located. So, if the asset is a property, it would be the country in which the property is situated and if it is a share, it would be where the share register is maintained.

When you die, certain countries levy special situs taxes on assets that are physically located within their jurisdiction. In the UK this is generally known as inheritance tax while in the US it is called estate tax.  Now these taxes are often double that of comparable taxes in South Africa.  It is therefore important that you be aware of what taxes may be triggered should you pass away. 

A bit of planning may result in significant savings but it is a double edged sword so I urge you to speak to a tax specialist before taking any action.

The UK levies a flat 40% inheritance tax on all assets in excess of GBP325 000.  This will be applied to fixed property, equities and cash in the bank. 

The USA levies an estate tax on a sliding scale that starts at 26% and goes up to 40%.  The threshold for the levy starts at a low $60 000.  

Something you should watch out for is that in South Africa and the UK, any assets that you leave to your spouse will only require the estate duty or inheritance tax to be paid when the last spouse passes away.  In the USA, the estate tax is payable on the first death unless your spouse is a U.S. citizen.

There are double taxation agreements in place between South Africa and both the UK and USA so you should receive a credit for the estate duty that you pay in South Africa.   You pay 20% estate duty in SA for your assets below R30m and 25% for those above R30m. 

A bit of clever planning can result in a significant saving in tax if you can have those assets that would typically trigger situs tax deemed to be South African assets.  This is usually done by moving the asset into an offshore wrapper like a sinking fund or endowment.

If your offshore investments are in a wrapper, it will be deemed to be a South African asset and not trigger situs tax.  In addition to this there will be no grant of probate required.  This will also facilitate a rapid and seamless transfer of the asset to the next generation. This is a great way to start creating multi-generational wealth.

There are times when an offshore wrapper does work so you need to be careful when:

• the plan holder emigrates from South Africa.

You could find yourself in a situation where the wrapper is subject to South African tax and your new country of residence may also tax you. This could result in double taxation. 

• the beneficiaries of your endowment or sinking fund are resident offshore

The proceeds at your death could be treated as “death benefits” from a foreign insurer and potentially taxed as income. 

It is therefore important that you structure your offshore investments carefully so as not to suffer any unpleasant unintended consequences.

Offshore assets make a difference to our portfolios by enhancing returns and reducing risk.  However, it is vital that we are aware of those areas where we may be opening ourselves up to any unintended consequences cause by factors like situs tax.