Question: My financial adviser 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 interesting new terms like situs tax.

Situs tax is the tax levied in the country where the asset is located. If the asset is a property, it would be the country where the property is; 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; in the US it is called estate tax.

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 by your death. A bit of planning may result in significant savings.

But because it is a double-edged sword, 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 £325,000. This is applied to fixed property, equities and cash in the bank. The US levies 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 on the death of the last spouse. In the US, the estate tax is payable on the first death unless your spouse is a US citizen.

There are double taxation agreements in place between South Africa and both the UK and US, so you should receive a credit for the estate duty that you pay locally.

You pay 20% estate duty in South Africa for assets below R30-million and 25% for those above that value. 

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, there will be no grant of probate required. This will also facilitate a rapid and seamless transfer of the asset to the next generation. It is a great way to start creating multigenerational wealth.

There are times when an offshore wrapper doesn’t work. 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 overseas. 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 unintended consequences caused by factors like situs tax. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.