By Bianca Maritz. Wills and Estates Specialist at Sentinel International
If you’ve never heard of situs tax, you’re not alone. Read on for a crash course in one of the pivotal concepts of global estate planning.
Say what? Situs tax? What on earth is that?
Don’t be embarrassed if you’ve never heard of this important offshore planning concept – we’re here to talk you through it. ‘Situs’ is Latin for ‘position’ or ‘site’. The situs of an asset is, therefore generally the place where the asset is deemed to be located for legal purposes, for example:
- the location of immovable property
- the place where a share register is maintained
- the place where a company has been incorporated
Let’s take things back a step
We all know two things in life are certain: death… and taxes! So, what taxes can one expect on death? The tax levied in South Africa on deceased estates is commonly known as estate duty. But what about other countries? In this article, we’ll look at two common jurisdictions for offshore investments – the United Kingdom and the United States.
The tax levied on deceased estates is called inheritance tax in the UK and federal estate tax in the US. These taxes are generally levied on assets that are classified as UK or US situs assets respectively…Even when non-residents like you and me own these situs assets.
When you own assets in different jurisdictions, you potentially become liable for taxes in all jurisdictions where your assets are located. This includes income tax, capital gains tax and estate tax among others. These taxes can have a significant impact on your estate planning…This is why it’s crucial to get professional advice on structuring your assets and estate in the most beneficial way possible.
Ok, so what now? Must I pay tax in all these countries?
South Africa has a residence-based system of taxation, which means that South African residents are subject to income tax and estate duty on their worldwide assets. Depending on the assets you own and how you acquired them, you may be subject to taxes in the other jurisdictions where you own assets, in addition to in South Africa. This can be seen as quite unfair. You’ve worked so hard to preserve your wealth, only for it to be taxed heavily.
But fear not; there is some light at the end of the tunnel. Double Taxation Agreements (DTAs) help to determine the extent of your tax liability. Many countries enter into DTAs with one another to provide relief to taxpayers who own assets in different jurisdictions and, as far as possible, to avoid a scenario where you might pay tax twice on the same asset.
This is where situs tax comes in. Generally, the country in which an asset is located (the “situs”) is regarded as have taxing rights over that asset. South Africa has DTAs with both the UK and the US. Depending on the exact terms of the agreement, you may be able to deduct the tax payment made in the US and/or UK against any tax payable in South Africa.
If you tick one or more of the boxes below, it is best to seek professional estate planning advice to understand and optimize your tax situation:
- You are resident in South Africa; and
- You are non-resident and non-domiciled in the UK and/or non-resident in and not a citizen of the US at the time of your death; and
- You hold assets in either (or both) the UK or US.
How much estate duty will I pay in each country?
It is best to bear in mind each country’s main estate taxes and how they are levied.
South Africa levies 20% estate duty on assets up to R30 million. Assets exceeding R30 million, are subject to estate duty of 25%.
The UK levies a flat 40% inheritance tax.
The US levies between 18% and 40% federal estate tax.
NB! All three countries have thresholds below which no estate duties are payable. In South Africa, the threshold is R3.5 million, £325 000.00 in the UK and $60 000.00 in the US.
And how do the rules vary from country to country?
In South Africa, if you leave your entire estate to your spouse, the surviving spouse receives what’s known as roll-over relief. This allows them to effectively double the R3.5 million threshold remains so that a total of R7 million is exempt from estate duty when they pass away after you.
You might be inclined to wonder if an attempt to dispose of assets during your lifetime is a way out of all these taxes. Unfortunately, not. In South Africa, donations tax is set at 20% of any donations above R100 000.00 in one tax year – exactly the same value as estate duty. There is, however, one small relief as anything donated between spouses is exempt from donations tax.
In the UK, there is a complete spousal exemption for transfers between spouses and civil partners if both are domiciled in the UK. There is also a complete spousal exemption for transfers from a non-UK-domiciled spouse or civil partner to a UK-domiciled spouse or civil partner. However, there is a lifetime limit of £325 000 on the value of assets that can be transferred (free of inheritance tax) by a UK-domiciled spouse or civil partner to their non-UK domiciled spouse or civil partner.
The UK has a rather interesting way of calculating gift taxes. Gifts given less than 7 years before you die may be taxed depending on:
- who you give the gift to and their relationship to you
- the value of the gift
- when the gift was given
You can give away gifts to the value of £3 000 each tax year, without them being added to the value of your estate. You can apply this annual exemption to one person or split it between several recipients. A nice little treat in the UK is that you can carry any unused annual exemption forward to the next tax year, but this is only valid for one tax year.
No tax is due on any gifts you give if you live for 7 years after giving them – unless the gift is part of a trust. If you die within 7 years of giving a gift and there’s Inheritance tax to pay, the amount will depend on when you gave it. Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’ with more recent gifts attracting higher taxes (up to 32%) and gifts given longer ago being taxed at lower rates.
The UK also has some gifts that are exempt from Inheritance Tax. There’s no Inheritance Tax to pay on gifts between spouses or civil partners, as long as they live in the UK permanently and are legally married or in a civil partnership with you. There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties.
In the US, there’s an unlimited marital deduction for spouses who are both US citizens. If the surviving spouse is not a US citizen but property is bequeathed by a spouse who is a US citizen to a ‘qualified domestic trust‘ to benefit a spouse who is a non-US citizen, then they will also qualify for the unlimited marital deduction. In all other cases, the exemption amount is limited to US$60 000.
The gift and US situs tax exclusions are generous for US citizens and residents. Each individual can transfer a total of $12 060 000 (as at 2022) of assets before US situs tax or gift tax is chargeable. Non-citizen and non-resident persons are subject to US situs taxes only to the extent that they have US situs assets. Exclusions and deductions for non-citizen non-resident persons are limited.
For US situs gift tax purposes, the first $16 000 (as at 2022) of gifts of US situs assets (per donor, per person, per year) are free of tax. Gifts of US situs assets in excess of the annual gift tax exclusion are taxed at progressive rates of between 18% and 39% on values up to $1 000 000 and at 40% above the value of $1 000 000. The same sliding scale is applied on death.
Thanks for all the info! But what does it mean for my Will?
Bearing all of the above in mind, we’d strongly advise sitting down with a professional team to go through each asset and its jurisdiction in meticulous detail to decipher the best, most tax-efficient structuring of your affairs.
Depending on your situation the professionals may recommend preparing a separate offshore Will to cater for your situs assets. If this is the route for you, then your estate structure will involve two separate Wills that don’t conflict with one another – one dealing with your South African assets and the other dealing with assets outside of South Africa. Depending on what countries are at play, there might even be a need for more than two Wills.
If you have assets in multiple jurisdictions, it’s vital to come up with a plan that separates the tax liabilities and ensures that your assets follow the correct estate administration process in the country of their situs.
For more information or to sit down with a professional, contact Sentinel International Advisory Services today!