Investor guide to successfully navigating situs taxes



Theunis Ehlers

With the rand punching above its weight and the US dollar on the back foot, you may be ready to seize the opportunity to add offshore company shares to your investment portfolio. But failing to carefully consider the tax implications of these investments could have a severe impact on your estate and loved ones should the worst happen, warns Theunis Ehlers, Director at Citadel Fiduciary Propriety Limited.

Investments in shares of companies registered in another country or jurisdiction may be subject to that country’s specific death taxes, also known as situs tax. Assets in the United States (US) and United Kingdom (UK) could for instance be subject to a 40% estate tax rate instead of the 20% applied to assets in South Africa.

“If you have taken the decision to invest offshore, you need to be careful of the costs and taxes involved and ensure that these won’t defeat your investment objectives, for instance by negatively impacting the value of your estate should you wish to provide for your heirs,” he says.

“You also need to ensure that your executor is aware of situs tax laws. Note that should the executor of your estate unwittingly pay benefits to your heirs without paying the necessary taxes to various revenue authorities, your beneficiaries could later be held responsible for both the tax liability and severe additional penalties.”

US assets such as shares in US companies are subject to Federal Estate Tax (FET). As a non-US citizen or Non-Resident Alien, only $60,000 of the value of your US assets would be exempt from FET, and thereafter would be taxed on a sliding scale of 18% to 40%. Moreover, unlike in South Africa, the unused exemption amount will not roll over to your spouse unless your spouse is a US citizen.

Should your US situs assets amount to a value of more than $60,000, there would be an obligation to report the assets to the Internal Revenue Service (IRS). The cost of making the necessary filings through a US lawyer is approximately $5,000.

In comparison to the US, the UK’s Inheritance Tax (IHT) laws allow for a much more generous tax exemption or ‘nil rate band’ of up to £325 000. Similarly to South Africa, bequests to a surviving spouse are exempt from IHT, which means that up to £650 000 could be exempt from IHT between you and your spouse’s estates. However, any UK assets above this amount would be subject to a flat tax rate of 40%.

Ehlers notes that compared with South Africa’s estate duty, applied at a rate of 20% of the net value of the estate above R3.5 million, this means that you could pay a substantially higher amount of tax on UK or US assets unless you take care to invest in a tax-efficient manner.

Beware the nominee account myth

Ehlers cautions, however, that some investors continue to operate under the mistaken impression that situs tax can be avoided by investing through a nominee account.

For example, this would apply where an investor approaches their South African financial services provider, Company A, to invest on their behalf in a portfolio of US shares held by another financial institution in Europe, or Company B. The shares would then be held in a nominee account administered by Company B outside US jurisdiction.

As the shares would be managed under an agreement between Company A and Company B rather than being held under the individual investor’s name, some believe that situs tax would not apply.

“However, as both US and UK tax authorities consider the underlying investor the beneficial owner of the shares, the shares would still need to be reported to relevant authorities for tax purposes,” he explains.

“It would also be a mistake to assume that foreign revenue authorities would be unaware of your passing if the shares were held under a company name, as South Africa is part of intergovernmental tax agreements enabling authorities to share tax information on foreign account holders.”

Tips for investing offshore tax-efficiently

He notes that this does not mean that you should avoid investing offshore entirely, and offers some tips for choosing more tax-efficient options to achieve foreign exposure:

Select your investment platform carefully

Investments through certain offshore unit trust portfolios, Exchange-Traded Funds (ETFs) and insurance wrappers may not attract situs tax even if they hold underlying assets such as UK or US shares. This would usually apply where the ETF or unit trust portfolio is incorporated outside of the relevant jurisdiction.

You could also consider investing through an offshore trust or an offshore company, although this would require specialised structuring.

Transfer your situs assets

If you are already invested in a portfolio of shares that will attract situs tax, you could consider selling these investments and placing funds in platforms that are not considered to constitute situs assets instead. Remember, however, that although there may be some exceptions, selling your initial investments could trigger Capital Gains Tax (CGT), as well as transactional costs.

Maintain assets in line with SA Estate Duty

Another option to consider would be to balance the value of your foreign situs assets such that these assets don’t incur tax above what your estate would be taxed in South Africa. For example, US shares worth $230,000 would be taxed at approximately 20%, similar to South Africa’s estate duty tax rate. Should you consider this, be aware of the cost implications of making the necessary filings in the foreign jurisdiction.

Before taking any of the above options, however, you should ideally consult a professional financial adviser to discuss all the implications of your decision to invest offshore, and your chosen investment platform, emphasises Ehlers.

“A professional advisor will not only be able to guide you in reaching your investment goals as part of a sound long-term financial strategy, but also ensure that you have the correct tax and legal information from relevant experts at your disposal.”