Situs taxes and international investments
Summary
Investors who own United Kingdom and/or United States assets, could be liable for various taxes in these jurisdictions that will have a significant impact on long-term investment outcomes, and it is therefore critical to receive expert advice when structuring international wealth.Introduction
Death attracts a significant quantum of tax. Firstly, death triggers a deemed disposal and payment of capital gains tax on almost all assets owned by the deceased. After payment of the capital gains taxes, estate duty is charged at a rate of 20% for estates less than R30 million in value, and at a rate of 25% on the value of the estate above R30 million. Payment of the various death taxes is a major liquidity event that requires careful planning.
Perhaps not so commonly recognised is that South African residents could also be liable for death taxes on situs assets in the United Kingdom and the United States.
Situs tax
Situs is Latin for ‘site’. The situs of an asset is generally the place where that asset is located for legal purposes. The situs of immovable property is the country where the property is situated. In the case of a company, the situs is where the company is incorporated or where the company’s securities register is maintained.
In the United Kingdom, 40% situs tax is charged on situs assets over the value of £325,000. In the United States, 40% situs tax is charged on situs assets over the value of $60,000.
Not all types of investments are subject to situs taxes
The classification of assets that attract situs tax is complex, with various exemptions. For example, United States interest-generating bank deposits are not subject to situs tax, provided the deposit is not connected with a United States domiciled business.
Double-taxation agreements provide some relief
South Africa has double-taxation agreements with the United Kingdom and the United States that allows for relief for the situs tax payment made in the United Kingdom and/or United States against any estate duty payable in South Africa, in certain instances.
Administrative burden
Should a South African deceased estate contain assets subject to situs tax, it will significantly complicate the finalisation of that estate. The executor of a non-domiciled individual’s estate with United Kingdom situs assets must file an inheritance tax return with Her Majesty’s Revenue & Customs within a year. The executor of a non-resident individual’s estate with United States situs assets must file an estate tax return with the Internal Revenue Service within nine months.
Structuring international assets in a situs efficient way
Specialised structuring to house the international assets in an offshore structure, is one of the most effective manners to avoid situs taxes. Owning United Kingdom and/or United States investments, via funds outside the relevant jurisdiction, is another method to avoid situs taxes.
However, the United States in particular, remains extremely innovative and some wonderful investments are only available in that country. Depending on the near-term risk of triggering situs taxes, the benefits of these investments could still justify ownership thereof.
Specialist advice required on international assets
The rules pertaining to situs tax are complex and are further complicated by double-taxation agreements. Investors that own United Kingdom and/or United States assets could be liable for various taxes in these jurisdictions that will have a significant impact on long-term investment outcomes. It is, therefore, critical to receive expert advice when structuring international wealth.
