Getting your estate structure wrong can mean the difference between comfort and misery

Your estate is subject to both local and offshore taxes and duties. Local and offshore estate planning has never been more challenging, or vital.
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High-net-worth South Africans who have built up decent-sized offshore investment portfolios often discover that while the investment growth has been excellent, they are penalised because insufficient attention was paid to the estate structure.

Complications around both local and offshore taxes could impact the eventual returns of your offshore investments, says Anton Maskowitz, fiduciary and tax specialist at Sanlam Private Wealth.

The first point to consider is the source of any offshore investments. South Africans are allowed R1 million a year by way of the single discretionary allowance (SDA) and a further R10 million a year in what is known as the foreign investment allowance (FIA). The FIA requires a tax clearance from the South African Revenue Service (Sars), but no tax clearance is required for the R1 million SDA.

If an individual wants to invest more than the amount allowed in terms of the FIA, this is possible on application to Sars and such an application will be subject to a more stringent verification process – which is likely to mean that Sars will conduct a much more in-depth audit of the individual’s tax affairs and will also verify the source of funds.

In effect, this means there is no limit on the amount of direct offshore investment available to such a South African resident.

“If you are a South African tax resident, you can use your R1 million a year SDA for travel, maintenance, investment and donations, but there is a sting in the tail if the R1 million or part of it is not used for investment purposes,” says Maskowitz.

He explains: “If, for example, it is used for travel, any unused portion must come back to SA. That is not the case if the R1 million is used for investment.”

Local and offshore taxes applicable on offshore investments

As of 2017, Section 7C of the Income Tax Act was introduced to close a popular loophole that allowed individuals to make interest-free or low interest loans to a discretionary trust which is a connected person. Now the act says if you make an interest-free loan to such a trust, you must deem an interest rate of repo plus 1% on that loan. To the extent that the interest portion is not paid, that will be subject to donations tax. If there is a foreign loan involved, the interest rate is the SA repo equivalent applicable in the currency of the foreign jurisdiction plus 1%.

Several other factors must be considered when structuring your taxes as part of your overall wealth strategy, says Maskowitz.

South African estate duty: In SA, this tax is paid by the estate of the deceased in the form of estate duty. The beneficiary inheriting the funds generally has no liability to pay the tax, as the estate has already paid it. The estate duty rate is 20% on the dutiable amount for estates up to R30 million, and 25% for anything above R30 million.

Foreign inheritance tax: Most countries have their own inheritance and estate duties or taxes, and a South African resident owning a foreign asset may be subject to these. For example, the UK and US apply rates of up to 40% on assets located in these countries. Depending on whether an estate duty double taxation agreement is in force with SA, the rates levied in the foreign jurisdiction may be in addition to the SA estate duty. Where such an agreement is in force, the higher rate of the foreign jurisdiction will typically apply, with SA giving a credit against the SA estate duty payable, limited to the amount that would have been payable in SA.

SA donations tax: This is levied at a flat rate of 20% on the value of the property donated. However, donations exceeding R30 million are taxed at a rate of 25%. Section 56(1) of the Income Tax Act contains a list of exempt donations, including those between spouses, and donations to approved public benefit organisations. An annual exemption applies on the first R100 000 of property donated.

Probate: This is the process whereby a will is ‘proved’ in a court as a valid public document and accepted as the true last testament of the deceased. Probate will generally be required in most common law jurisdictions in which an asset is held, and ‘proving’ an SA will in that jurisdiction can be a time-consuming and costly affair.

In civil law countries, the process – especially when it comes to fixed property – is typically quite different and if the country in question doesn’t recognise the provisions of a South African will or the authority of the executor, this can, apart from many other complexities, result in assets being allocated to unintended beneficiaries.

Considering an offshore will is therefore advisable and often necessary to clarify and simplify the process.

“There are a lot of ways to get it wrong when it comes to local and offshore investment planning,” says Maskowitz. “You need the right skills to plan your offshore investment journey from start to finish. And you need an experienced team that has expertise, both locally and internationally. It is becoming increasingly challenging and complex to properly plan wealth management solutions, both onshore and offshore.”

For further information, contact Anton Maskowitz.

About Sanlam Private Wealth: The business was formed nearly 20 years ago, and has evolved from a small stockbroking firm to a holistic wealth management business with a strong track record, and assets under management and administration of more than R151 billion. Sanlam Private Wealth custom-crafts wealth solutions for high-net-worth individual who require end-to-end solutions that include global investment portfolio construction, intergenerational estate planning, cross-geographical tax structuring, equity-backed finance and traditional stockbroking.

Brought to you by Sanlam Private Wealth.

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