Offshore assets and a will, what you need to know

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By Suzean Haumann* 

If you have offshore assets – property or an investment portfolio – you may need an offshore will in addition to a South African will, for your local assets. As with all financial matters, tax issues – in this instance estate duty, are of relevance.

Suzean Haumann

Whether to have a foreign will or not depends on individual circumstances and it is a personal decision. If an investor only has an offshore investment portfolio and no other immovable assets, like property, a local will would be sufficient for the winding up of the estate. It is also easier for beneficiaries to deal with only the local executor, instead of an unknown one in a foreign country. When there are immovable assets however, a global will is a good idea. The arguments in favour of having separate wills for different jurisdictions, include using experts in the jurisdiction where property is located, so each can apply their expertise to ensure that the will is correctly drawn up, according to the laws of that jurisdiction and allowing the administration processes in the different jurisdictions, to run independently of one another.

When dealing only with investments in common law jurisdictions, such as Guernsey, it is possible to execute a single worldwide will in South Africa and for a Guernsey executor to act on resealed letters of executorship, issued by the SA Master of the High Court, which works quite well in practice. The South African executor would then instruct an agent in the other jurisdiction, to attend to the administration of the assets, situated in the jurisdiction where they are situated. In some instances where there is more than one owner on an investment contract the contract will not be “frozen” but merely be transferred to the surviving owner’s name without implications. The deceased’s half-share of the portfolio will be included in his or her South African estate for estate duty purposes.

International Estate Taxes

Both the United States (US) and the United Kingdom (UK) have situs taxes – situs meaning position or site. The authorities in the jurisdiction where the asset is located has the legal authority to tax the asset, in this case, in terms of inheritance taxes (UK) and estate taxes (US). (For ease of reference both are referred to as estate taxes). Even though the owner of these assets is a non-resident, these taxes will apply to all share portfolios and property, owned in these countries. Note that unit trust investments are excluded. Estate taxes can be as high as 40% of the market value, of those assets.

In the US these taxes will be levied on estates of non-residents, where the combined value of the assets in the country exceeds $60 000, on a sliding scale. In the UK the estate taxes will be levied on estates with assets of a combined value more than £325 000.

In South Africa, estate duty is levied on worldwide assets. The amount payable will be calculated after application of the Section 4A abatement of R3.5m, as well as any other deductions or exemptions, such as section 4(q), afforded to surviving spouses. The net total after deductions is taxed at the current rate of 20%. The second dying spouse’s estate will benefit from a spousal rollover of the Section 4A abatement, bringing the total abatement in their estate to R7m. The UK has a similar ruling, subject to certain requirements and limitations, but the US does not, and will not grant any exemption, except if the surviving spouse is a US-citizen.

Both the US and the UK have entered into a double taxation agreement preventing the situation, where the same asset will be taxed twice, but in such circumstances, the estate tax payable will be charged in the country with the highest rate. That would be the country where the asset is based. In a SA estate a tax credit will be granted against the estate tax paid, but it is capped at 20% of the amount paid.

Solutions

When investing in direct share portfolios investors should look at doing it through a “wrapper”-type product – such as an endowment or unit trust structure. Usually there is a five-year restriction period, where there are limits on withdrawal options. Keep in mind that direct offshore investments are high risk investments and a long-term investment horizon when investing is advisable – so that the restriction period does not pose such a huge draw-back. In these endowments, higher-income investors, who fall into the higher tax- bracket, will enjoy a lower capital gains tax rate and no situs tax will be applicable upon the death of the contract owner.

Note that should no stand-alone share-portfolio be in place and the owner wishes to transfer such portfolio into a unit trust or endowment product, the transfer might have capital gains tax implications.

It is at all times advisable to consult a certified financial planner and tax practitioner when doing investment and estate planning; especially for international assets.

  • Suzean Haumann is a financial services advisor™ & foreign exchange consultant at Brenthurst Wealth
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