The basics of situs assets: a South African perspective

As the saying goes, the only certain things in life are death and taxes… or in this case, death taxes (also known as estate duty or inheritance tax). To minimise these types of taxes, it is crucial that you have a plan in place. See here for our previous newsletter on death tax anomalies across Africa and today we look at how the situs rules play into death taxes, with a focus on South Africa.

What are situs assets?

Situs is a Latin word meaning “site” or “position”. The situs of an assets is considered the place where the asset is located. For assets which have their “situs” in certain jurisdictions, estate duty or inheritance taxes are levied on such assets, in those jurisdictions, irrespective of whether the owner of the assets was a tax resident of that jurisdiction.

Well, what does this mean in practice? It means that the country in which the asset is situated as well as the country in which you are tax resident could raise taxes on the same asset, resulting in double taxation.

The SA situs asset rule

For SA estate duty purposes, estate duty is levied on all property of a person who is an SA tax resident, wherever it is situated. SA will therefore levy estate duty on its tax residents on a worldwide basis. But, that is not all, SA will also levy estate duty on the estates of non-residents on their SA-based assets at a rate of 20% or 25%, depending on the value of the assets. Moreover, other countries may also levy inheritance tax on your assets even though you are an SA tax resident because those assets are situated in that country, for instance in the United Kingdom (“UK”).

A very simple example:

Mr Xomolo is an unmarried ordinary resident in SA for tax purposes and his only asset is a fixed property situated in the UK, valued at R24 million (±GBP1 million). Mr Xomolo passes away and his asset is bequeathed to his only son (an SA tax resident individual) in terms of his will.

The UK will levy inheritance tax at a rate of 40% on the inheritance of the UK property because of its UK “situs”, with an exemption of the first GBP 325 000, resulting in UK inheritance tax in the amount of GBP1 000 000 – GBP 325 000 = GBP 675 000 x 40% = GBP270 000.

Converted to ZAR = ±R6,48 million.  The South African Revenue Services (“SARS”) will also levy estate duty on the property because MR Xomolo was ordinarily resident in SA at the date of his death as follows: R24m – R3,5m abatement= R20,5 m x 20% = R4,1m.

In total, the death duties on the property would amount to a whopping R6,48 mil + R4,1 mil = R10,58 mil, which is almost half the value of the property. Now Mr Xomolo’s poor beneficiary might have to sell the property in order to pay the tax on Mr Xomolo’s death!

Relief: Double Tax Agreements

SA has entered into estate duty agreements (“EDA”) with Canada, Botswana, Lesotho, Eswatini, Sweden, UK, United States of America (USA) and Zimbabwe to alleviate the double tax upon death.

In terms of the SA/UK EDA, immovable property may also be taxed in the country in which such property is situated. The EDA therefore does not provide relief from inheritance tax in the UK, so in essence, both countries have taxing rights to the same asset.

Domestic relief

Luckily, the SA Estate Duty Act provide for a credit for any foreign taxes paid up to the tax payable in SA. Therefore, as per the example, should Mr Xomolo’s estate be liable for inheritance tax in the UK at a rate of 40%, the SA relief will allow for a credit of up to 20% from the SA Estate Duty. This means that the total death taxes on the property would be 40%, or looking at the numbers R6,48, being the full 40% tax in the UK, with a credit for the full 20% in SA. At least the total tax is reduced from R10,58 mil to R6,48.

You will note from the example that SARS will limit the deduction of foreign tax paid to the tax that would have been paid in SA. Since the tax in the UK is higher, the estate will be liable for the full 40% tax in the UK and receive a full deduction for tax in SA. Even though the estate will be liable for the higher 40% inheritance tax rate, at least this mechanism prohibits double tax on the same asset.

Who claims the relief?

It should be noted that the executor is the person responsible for claiming the foreign tax credit from SARS, thus it is imperative that they are aware of all the foreign assets you own, and how they are taxed abroad on your death. Our previous newsletter on tax treaties will shed some light on the usefulness of these agreements.

Non-residents

It is important to take note that the fact that if you have emigrated from SA, does not mean that you will fall outside the ambit of SA Estate Duty, as you will still be subject to SA Estate Duty on your SA movable and immovable assets as per the local legislation. It is crucial to understand that non-residents may be subject to estate duty on their SA situs assets although the country where they are tax resident does not levy estate duty or inheritance taxes in terms of its local legislation.

Mauritius for one does not have estate duty nor inheritance tax but should a Mauritius tax resident own assets in for instance the USA, UK or even SA, they could be subject to estate duty or inheritance tax on these assets (assets located within these jurisdictions) when they pass away. For SA situs assets, this could result in non-resident estates being liable for estate duty in SA at a rate of 20% or 25% (on the value of the estate exceeding R35 million), USA at a rate of 40% and in the UK at a rate of 40% (subject to the various primary abatements), with no tax credit available to them in terms of the local Mauritius legislation.

Conclusion

Always ensure that you chat with a professional and keep your executor in the loop about your foreign assets. It is vital to include provisions for foreign situs assets in your will because estate planning is key. Want to know more about this? Get in touch with one of our tax experts today.

Regan van Rooy

Regan van Rooy offers bespoke tax solutions for every business type and every business stage. Get in touch today to chat to one of our expert consultants.