Why on earth pay more tax than you legally have to, anyway?
In the second of a two-part series, LEIGH ROBERTS shows you how to organise your foreign investments in the most tax-efficient way
WHILE your soul may move on to greater heights, the material wealth you leave behind when you die is subject to estate duty tax.
This fact may be of more concern to your heirs, but it's the principle of the matter - why on earth pay more tax than you legally have to?
Estate duty is levied on your dutiable goods after their total value exceeds R1-million. The current tax rate is 25%. The main exemption on this tax is if you leave your goods to your spouse - but then your spouse's estate will pick up the tax tab.
If you have taken advantage of the R400 000 overseas investment allowance, your newly acquired foreign assets will not, unfortunately, escape local estate duty.
The Estate Duty Act ensures your assets, no matter where they are, fall into the net.
But there are two exceptions to this rule, and there's some tax planning you can do to lower the estate duty burden.
Tax advocate Tony Davey, group lawyer of the Fedsure group, says this is particularly important to emigrants.
"Emigrants must ensure they are not classified as resident in South Africa and fall into the trap of being liable for estate duty here as well as in their new country of residence (barring an efficient double-tax treaty between the two countries).
Davey says the definition of "ordinarily resident" extends to both your physical presence and your intention to live in a country.
"So, where a person has a residence in more than one country, his usual residence is the determining factor."
'The Estate Duty Act ensures that your assets, no matter where in the world they are, fall into the net, unless you take precautions'
"The assets should go into a trust which is registered in a tax haven, because then the investment growth of those assets belongs to the trust and thus falls out of your estate."
And this growth can be pretty substantial. For example, if you invest R400 000 now and assume a 15% annual return - this is a combination of the investment growth and the depreciation in the rand - your foreign nest egg will be worth a hefty R1.6-million in 10 years' time, on which your heirs will have to pay 25% estate duty if it's not held in a trust.
Davey stresses that your trust must be registered in the tax neutral territory of a tax haven country - anything else and you're merely jumping from the fat into the fire.
'Donations tax is payable on donations by persons who are ordinarily resident in South Africa, and not by non-resident emigrants'
"You don't want to be in a foreign jurisdiction that imposes inheritance tax, such as the UK or US," he warns.
The United Kingdom has a 40% flat rate inheritance tax, and estate duty rates in the United States range up to 55%.
A trust established in a tax haven such as the Channel Islands (Guernsey or Jersey), the Isle of Man or in the Mediterranean (Gibraltar, Malta, Cyprus) or the Caribbean (Bermuda, Bahamas, Cayman Isles, British Virgin Isles) would have no death duties levied and, in most instances, no income taxes are levied there either.
Davey advises that, when choosing a tax haven, you consider other issues too, such as political stability, an established legal system, confidentiality, language compatibility, money laundering rules, and so on.
Besides the tax advantages of having an offshore trust, there are also non-tax benefits to consider, too:
Emigrant's tax tip
"Donations tax is payable on donations made only by a person ordinarily resident in South Africa.
"It follows, then, that a non-resident emigrant can make a donation of assets situate in South Africa without liability for donations tax or estate duty," explains Davey.