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How to avoid the estate duty shock of investing offshore

by , 01 October 2019
How to avoid the estate duty shock of investing offshore
With business confidence in SA at its lowest in twenty years. And investors losing patience waiting for the sun to rise for the “New Dawn”, we're seeing more and more people taking money offshore.

While most people taking money offshore won't be aware of foreign inheritance taxes, they are creating a potential estate liability problem for their heirs. USA and UK inheritance tax can be as much as 40% on assets over USD 60,000 and GBP 325,000 respectively. And it doesn't matter where the custody of the shares or assets are.

Consider this example, John has assets in SA to the value of R7 million but has been steadily moving money offshore over the past 10 years. He has built up R7 million (USD 453,000) invested in a diversified portfolio of international shares. 60% (USD 270,000) of it is invested in listed USA companies. He would be liable for 40% Situs tax on the value that exceeds the USD 60,000 relief.

John's estate would be liable for 40% tax on USD 210,000 amounting to USD 84,000 or R1.27 million. The problem is his estate would only be able to claim a rebate of half of that against SA estate duty payable. As SA estate duty is payable on worldwide assets and limits the deduction of foreign inheritance taxes to 20% of the value. John's estate will be liable for estate duty on R10.5 million (reduced by the R3.5 million abatement).

Excluding other fees etc. Estate duty payable in SA would be R2.25 million less R635, 000 (20% of USD 210,000) but John's estate paid R1.27 million in Situs tax to the IRS. The estate duty burden reduces the total value of SA assets from R7 million to R5.385 million and the offshore assets from USD 453,000 to USD 369,000.

All of this can be mitigated by the correct offshore structure.

You won't get way from paying estate duty in SA, but you can reduce your offshore inheritance tax by setting up your listed offshore investments in a wrapper. The wrapper lives on after you pass so offshore estate duty is not applicable. It also takes care of all the taxes and reporting within it, so you don't have to worry about that. You will still be liable for SA estate duty, but the assets can flow to your beneficiaries before your estate is even wound up. You can nominate an offshore trust, so the funds never have to come back to SA.
 
We have several offshore wrapper solutions suitable for offshore portfolios larger than R2 million. Contact Gavin McCarter on email:  trader@protrade.co.za.
 
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The week ahead: 
 
Local: Money supply (30/09); Business confidence (01/10)
 
Local Results Due: ADI, AOO, BWZ, CLR, CND, GLI, GTR, MCZ, RTO, SSS, TRE, UCP (30/09), RSG (01/10); 4SI (03/10); ASCEUZ, PHM, TLM (04/10)
 
LDT (01/10): AFX, ATT, BTI, DSY, EPP, FVT, GRT, GRTJ, MUR, OLG, SAC, SCD, SUR
 
Special Dividend: ITE (01/10)
 
Other Economic data releases of interest…
 
Monday: ANZ Business Confidence, NZIER Business Confidence (NZL); Manufacturing PMI (CNY); Current Account (UK)
 
Tuesday: RBA Rate Statement, Cash Rate (AUS), ISM Manufacturing PMI (USA); GDP (CAN)
 
Wednesday: ADP Non-Farm Employment Change (USA)
 
Thursday: Trade Balance (AUS); MPC Member Tenreyro Speaks (UK); ISM Non-Manufacturing PMI (USA)
 
Friday: Non-Farm Employment Change, Unemployment Rate (USA); Retail Sales (AUS); Trade Balance (CAN)
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How to avoid the estate duty shock of investing offshore
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