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High interest will not protect you from a weak rand

Retiring overseas

WE ARE due to return permanently to the UK during 1998. I will be retired. Please clarify the following issues with regard to transferring the legal monetary allowance:

The present interest rates offered in SA are superior to UK rates. If I invest, for the short term, in a local bank's offshore fund in sterling, I will need to transfer the monthly interest to an overseas bank. What are the considerations?

As I'll be a resident in the UK and hold an "offshore" (SA) bank account, are there any UK tax implications on the interest earned? Is there a double taxation agreement between the UK and SA, and does this benefit my situation in any way?

I hold matured endowment policies to the value of R100 000. Should I sell these on the second-hand market and reinvest the proceeds in an SA offshore sterling account? While resident in SA, will I be taxed on the interest?

Daniel Macqueen of Falcon International Financial Services responds:

In terms of emigration allowances, you can take R250 000 per family unit, together with one car with a market value of up to R100 000, and personal effects also with a market value of R100 000 (all of which must have been owned by the emigrant for at least one year prior to departure). The balance of your assets must remain in South Africa and will become "blocked" (these are lodged with a financial institution such as a commercial bank).

Emigrants are allowed to receive up to R300 000 a year in interest or other income earned on their blocked funds, provided income tax is paid in SA, and liabilities, such as a mortgage or other debts, are being reduced to an acceptable level.

Traditionally, emigrants are often advised to invest in high interest-earning gilt or money market accounts to increase the income earned on their blocked assets - income which they may then receive overseas.

If you decide to invest in a sterling denominated money account with a local bank, you should be aware of the likelihood that the rand will continue to deteriorate in value against other major currencies. Thus the cost of investing in the sterling money account at, say, 6.75% a year, should be weighed against a higher rate of interest in a South African rand denominated account where the currency is deteriorating rapidly against sterling. (The rand deteriorated by over 34% last year and, although it recovered this year, there are fears that devaluations of the same magnitude may occur again.)

Once you become a permanent resident of the UK, you will be subject to UK income tax on your world-wide income - and this includes any interest earned on your deposit in an "offshore" bank account. However, an individual taxpayer is entitled to earn £4 045 a year free of tax, in terms of personal allowances in the UK for the 1997/98 tax year. At age 65, this allowance increases to £5 220 per individual. Although you are married, these amounts still apply to each of you. There is a further married couples allowance of £1 830 per couple, increasing to £3 185 at age 65.

So for a couple aged 65 or over, a total of £12 270 could be earned before tax becomes payable. The following £4 100 you earn would be taxed at 20%. The next tranche up to £26 100 is taxed at 23%, and anything above this figure at 40%.

There is a double tax treaty between SA and the UK. Of interest to you is the fact that individuals retiring to the UK and registering for tax purposes in that country are entitled to elect to pay tax on their SA retirement income in the UK, rather than in SA.

Given the personal allowances mentioned above, and compared with the tax threshold of R30 050 for a person over the age of 65 (this figure equates to £4 007 at today's exchange rate), it makes perfect sense for individuals retiring to the UK to choose to pay this tax in the UK.

On emigration, any interest earned within SA will be exempt from tax in terms of the non-resi dent tax on interest rule extended to emigrants.

Therefore, whether the interest is earned in sterling or rand, income generated from a deposit is not taxable.

However, it must be borne in mind that a UK resident is liable for tax in that country on their worldwide income.

Therefore, any interest income earned in SA should be reported on your UK tax return.

Whether or not to sell the matured endowment policies on the second-hand market is a difficult question.

On the one hand, the proceeds are free of tax while in South Africa and you can earn a premium on the sale of the policy.

On the other hand, once you have emigrated from SA, all proceeds of the sale of such policies are subject to blocked rand regulations.

ý We regret no personal correspondence can be entered into. The Sunday Times accepts no responsibility for the advice given in BT Money.