Inheritance and offshore heirs: your questions answered

by | Oct 31, 2022 | Advisory Services | 0 comments

We now live in a truly global village and it’s become increasingly common for South Africans to live and die in foreign jurisdictions. It goes without saying that this can result in some estate planning curveballs. Luckily, we’ve got international taxation specialist Anna Heydenrych on our side…

If my intended heir is living abroad, can they inherit from my South African Estate?

Of course they can! As a South African resident, you enjoy freedom of testation. When drafting a valid South African will you can bequeath the assets in your Estate to whomever you wish, wherever they reside. However, in terms of practically transferring funds to them, there may be some delays if an heir’s tax affairs are not up to date. Any heir who is still subject to exchange control regulations and is not tax compliant in South Africa is likely to face an uphill battle trying to remit the funds abroad because of the limitations placed on South African Reserve Bank (“SARB”) residents.

When is a resident a tax resident?

The concept of “residency” is frequently misunderstood. Residency for taxation purposes is different to residency for immigration purposes which in turn is different to residency for exchange control purposes. The Reserve Bank used to have a process for exchange control emigration where SARB noted the individual as a non-resident. This process was informally known as “financial emigration”. Since1 March 2021 changes in legislation mean you now have to cease tax residency before applying for an Emigration Clearance Certificate for SARB purposes.

When we refer to the “ceasing of tax residency” it’s important to understand that an individual will be at the mercy of SARS and the tax authority of their new resident country. No individual can elect where to have their tax residency or when to cease their tax residency. Secondly, should this cessation be forced upon an individual, the burden lies with that individual to take all the steps required to report this change in status to SARS. If you don’t, SARS will continue to treat you as a South African tax resident, and you will be liable for SA taxes on your worldwide income even though you reside abroad. What’s more, your new country of residence will likely also tax you on your worldwide income, causing a mismatch which will result in the double taxation of income.

Unfortunately, not many individuals moving abroad are proactive about investigating their tax residency status and the impact that ceasing tax residency may have. They are then faced with delays when they eventually need to obtain a Tax Compliance Status PIN to remit/receive funds abroad. Investigating tax residency status and applying to cease tax residency to SARS is something Sentinel or your tax advisor can assist with.

What’s a TCS PIN?

South Africans living abroad will need to show proof of their tax non-residency and compliance status to be able to remit/receive funds abroad. The process of receiving funds from a South African estate thus depends on whether or not the foreign heir has gone through the previous “financial emigration” process, the current verification process, or nothing at all.

When an heir living abroad is still subject to exchange control regulations, they have to obtain a Tax Compliance Status (“TCS”) PIN to be able to remit funds abroad. The question is thus whether an individual is subject to exchange control regulations or not – this is something that should be ascertained sooner rather than later.

When is a TCS PIN required?

If the heir formally emigrated for exchange control before 1 March 2021, funds can be transferred to the heir if they can provide proof of their emigration. The executor of the estate can pay the benefit from the local estate directly into their foreign bank account without limits on the amount.

If the heir hasn’t formally emigrated for exchange control, they can inherit from the South African estate, but their benefit will have to be paid into a local bank account held in their name. They will have to transfer the funds abroad through their Single Discretionary Allowance (“SDA”) and, should they wish to transfer more than the SDA of R1,000,000, through their foreign investment allowance (“FIA”) of R10,000,000 per annum. To utilise your FIA, you need to apply to SARS for a TCS PIN to give your authorised dealer.

If the heir hasn’t formally emigrated and has also not made an application to SARS to cease their tax residency, they will still be subject to the exchange control regulations, as explained in the previous paragraph.

What if the heir was never a South African citizen?

This is supposed to be a straightforward process with proof of your non-resident status (i.e. proof of foreign address and ID number) and tax registration in another country being sufficient to transfer the funds abroad. However, quite apart from the complexities of navigating SARS and SARB regulations, we have noticed that authorised dealers are designing their own set of rules and not cooperating to transfer funds. They insist that non-residents provide a TCS PIN despite the fact that these individuals have never been, nor should they ever be, registered with SARS. Such anomalies can only be dealt with on a case-by-case basis.

How do I obtain a TCS PIN?

A submission needs to be made to SARS via eFiling. In terms of section 256 of the Tax Administration Act, a taxpayer can only be compliant if they –

  • Are registered for tax in terms of a tax act
  • Don’t have outstanding tax debt
  • Don’t have an outstanding return

If an heir has been living abroad and does not meet the above requirements, they will not be able to obtain a TCS PIN. Receiving their inheritance will be delayed until they have brought their South African tax affairs up to date.

What does this mean for you and your cross-border family?

Do not underestimate the amount of information SARS has obtained through Common Reporting Standards and the like. Non-disclosure is not tax planning and it remains each individual’s responsibility to ensure that the reality of their situation is reflected in their tax administration. Establish whether your family members or heirs are tax compliant in South Africa and, if necessary, arrange a consultation with a specialist advisor.

Sentinel International has a team of super-specialist tax professionals who deal with issues pertaining to cross-border tax and estate planning on a daily basis. We would love to review your situation.