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Ok. Got itWhen you own UK and/or US assets, you potentially become liable for taxes in these jurisdictions, including income tax, capital gains tax and estate tax.
01 December 2020
The tax levied in South Africa on deceased estates is commonly known as estate duty. Perhaps not so commonly known is that the tax levied in the United Kingdom (UK) on deceased estates is called inheritance tax and that the tax levied in the United States (US) on deceased estates is called federal estate tax. These taxes are generally levied in the UK and US on assets that are classified as UK or US situs assets, even when these situs assets are owned by non-residents.
‘Situs’ is Latin for 'position' or 'site'. The situs of an asset is therefore generally the place where an asset is deemed to be located for legal purposes, for example:
When you own UK and/or US assets, you potentially become liable for taxes in these jurisdictions, including income tax, capital gains tax and estate tax. These taxes can have a significant impact on your long-term outcomes, which is why it is critical to get expert advice about the different ways to acquire foreign assets and structuring your international wealth.
Because South Africa has a residence-based system of taxation, 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 UK and/or US in addition to South Africa. This is where DTAs come into play.
The purpose of DTAs is to provide relief to taxpayers who own assets in different jurisdictions, ie to avoid as far as possible a scenario where taxpayers pay tax twice on the same asset (in different countries). Generally, the country in which the assets are located have taxing rights. However, the terms of the DTA agreements will determine the exact liability.
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.
The table below shows the various types of assets that will be subject to estate taxes in South Africa, the UK and the US as part of deceased estates of persons who are:
Country | South Africa | United Kingdom | United States |
Name |
Estate duty (ED) |
Inheritance tax (IHT) |
Federal estate tax (FET) |
Rate |
20% or 25% on the dutiable value of an estate above R30 million |
40% |
40% (maximum) |
Threshold |
R3,5 million |
£325 000 |
US$60 000 |
Rollover relief between spouses |
R7 million on the death of the surviving spouse. |
£650 000 on the death of the surviving spouse. There is a complete spouse exemption for transfers between spouses and civil partners if both spouses or civil partners are domiciled in the UK. There is also a complete spouse 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 IHT-free by a UK-domiciled spouse or civil partner to their non-UK domiciled spouse or civil partner. |
An unlimited marital deduction (rollover relief) is provided only between spouses who are both US citizens, ie the deceased spouse and surviving spouse must both be US citizens to qualify. 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 will also qualify for the unlimited marital deduction. In all other cases, the exemption amount is limited to US$60 000. |
Immovable property |
Subject to ED in SA. |
Subject to IHT in the UK. |
Subject to FET in the US. |
Exchange-traded funds (ETFs) |
Subject to ED in SA if the issuer (entity) of the ETF is registered (incorporated) in SA. |
Subject to IHT if the issuer (entity) of the ETF is resident or registered in the UK. Note: For example: If an ETF is registered in Ireland and the ETF invests on the London Stock Exchange, the situs would be determined by the residence of the person or company issuing the ETF, which in this case is Ireland. |
Subject to FET if the issuer (entity) of the ETF is registered (incorporated) in the US. Note: For example: If the fund (entity) issuing the ETF is incorporated in Ireland and the ETF invests on a stock exchange in the US, the situs would be determined by the place of incorporation of the fund (entity) issuing the ETF, which in this case is Ireland. |
Equities |
Subject to ED in SA if the share register of the company issuing the shares is held in SA. Note: |
Subject to IHT if the share register of the company issuing the shares is held in the UK. Note: |
Subject to FET in the US if they are ‘issued by a domestic corporation’, ie a corporation incorporated in the US and under the laws of any US state. American depositary receipts (ADRs) are not subject to FET because, although ADRs comprise stocks that trade in the US, they represent shares of stock of foreign corporations. ADRs allow US banks to purchase bulk shares from foreign corporations, bundle the shares into groups and reissue them on US stock markets. ADRs were developed because of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. |
Unit trusts |
Subject to ED in SA if the register of unitholders is kept in SA. |
No IHT on UK-authorised unit trusts and open-ended-investment companies (OEICs) authorised and regulated by the UK Financial Conduct Authority (these are ‘excluded assets’ and fall outside the estate of a non-UK domiciliary). |
Subject to FET in the US if the unit trust is deemed to be US-situs if it is ‘issued by a domestic corporation’, ie a corporation (or entity or fund) incorporated in the US. |
Foreign collective investment schemes (CISs) |
Subject to ED in SA (residence-based system of taxation). |
Generally excluded from IHT in the UK. |
Generally excluded from FET in the US. |
Cash accounts or deposits in banks |
Subject to ED in SA. |
Only British pounds held in a UK bank account will be subject to IHT – foreign currencies are excluded from IHT. |
US bank deposits (ie vanilla bank deposits) that generate interest income and that are held by non-resident aliens will be exempt from federal income tax and will not be subject to FET, provided that the deposit is not connected with a US trade or business. If funds are held in special deposits (ie specific kinds of money or moveable property is placed in the possession of the bank with an obligation imposed on the bank to return the identical thing deposited) by a US bank in a custodial capacity or in deposits held at US brokerage firms or other institutions that are not considered banks, no exemption will apply. Deposits held with a foreign branch of a US bank are treated as foreign situs property, whereas deposits with a US branch of a foreign bank conducting business in the US are treated as US situs property and are subject to FET. |
Loans made to UK-resident or domiciled individuals and US-resident individuals |
The situs of a loan is the place where the loan can be enforced or where the obligation to pay fails to be performed. A loan from a South African resident individual to another South African resident individual will be included in ED in SA. |
The situs of a loan is the place where the loan can be enforced or where the obligation to pay fails to be performed. A loan from a South African resident individual to a UK-resident or domiciled individual would therefore be a UK situs asset in the UK-resident or domiciled individual’s estate and will be subject to IHT. |
The general rule is that a loan will be US situs if it is a debt obligation of a US person. There are however instances where the debt of a non-resident alien will be “treated as outside the US”, and hence will not be subject to FET, such as inter alia, short term debt which is generally debt payable 183 days or less from the date of original issue; bank deposit debt that bears interest; and interest bearing debt if any interest thereon would be eligible for the "portfolio interest exemption" which is defined as non-effectively connected interest i.e. interest not effectively connected with a US trade or business and the interest is paid on an obligation (debt) that is generally in registered form, as opposed to bearer form, and the obligation must have been issued after 18 July 1984. There are other complicated requirements that will also need to be considered. |
Assets held by a trust |
South African-registered trust: The assets are generally excluded from the founder's estate. The value of assets settled on the trust through a loan account is generally pegged. |
International (offshore) trust: There is a 10-year charge on UK situs assets. |
International (offshore) trust: The assets are generally excluded from FET in the US, provided there are no beneficiaries resident in the US. US property transferred by a non-resident before death may in certain circumstances be deemed to have a US situs and therefore be subject to FET. |
Assets held by an international company |
Shares held in an international (offshore) company that are owned by SA-resident individuals will be subject to ED in SA. |
Shares held in international (offshore) companies that own UK immovable property are deemed to be UK situs assets and will be subject to the 10-year charge in the UK. |
Shares held in international (offshore) companies that own US situs assets are generally excluded from FET in the US. |
Assets held in an international life policy (life wrapper) |
If the international wrapper is held by a SA resident individual, it will be subject to ED in SA. |
Excluded from IHT in the UK. |
Excluded from FET in the US. |
Foreign assets acquired via an institutional foreign portfolio allowance (commonly called ‘asset swap’ investments) |
A South African investment manager registered as an institutional investor for exchange control purposes is authorised to use assets under its management to acquire foreign asset exposure (commonly called ‘asset swap investments’). Under the exchange control regulations, the institution is required to keep control of the assets. The client, however, remains the beneficial owner of the assets and tax, as a general rule, follows beneficial ownership. |
UK IHT implications, as set out above, will apply. |
US FET, as set out above, will apply. |
There are various ways to gain exposure to UK and US assets with a reduced tax liability
Considering your circumstances, please contact your wealth manager to discuss the options above in more detail. Our specialist expertise and personal advice can help you make informed decisions about your international exposure.
UK inheritance tax (IHT) |
US federal estate tax (FET) |
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Impact of where the assets are custodied
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Disclaimer: The above summary is provided for general information purposes only and should not be construed as legal, tax or other professional advice. We recommend that you discuss your circumstances with a registered tax practitioner to ensure that your unique circumstances are considered in order to accurately determine the tax and/or legal consequences relevant to your circumstances. To the extent that any reliance is placed on the information contained herein, without seeking professional advice, Nedbank Private Wealth accepts no loss or damage whatsoever or howsoever arising.