29 June 2021
These foreign estate taxes, also known as inheritance tax, can be avoided by holding certain investible assets (for example ETFs and shares) in an offshore life wrapper or policy. The potential reduction in costs and taxes is significant, says Colin Archibald, Regional Manager at Glacier International. He unpacks foreign inheritance tax and the advantages of offshore life wrappers in mitigating these costs.
‘Situs' is Latin for 'position' or 'site' and generally the place where an asset (such as fixed property, collective investments, shares and ETFs, among others) is located. For the purpose of this article, the focus is on owning investment assets in the US or the UK. The situs rules for inheritance/estate tax purposes vary from country to country and can be, for example, the physical location of immovable property or the place where, for example, a share register is kept and maintained. Under US and UK situs laws, as a non-resident, your foreign assets (those worth over $60 000 in the US and £325 000 in the UK), could result in inheritance tax in the UK or federal estate tax in the US as high as 40% when you die. Moreover, the assets will still be included in your South African estate for estate duty purposes. Estate duty in South Africa is currently 20% for dutiable estates under R30 million and 25% for estates over R30 million.
Important to note that South Africa has double estate duty agreements with very few countries, namely the US, UK, Botswana, Lesotho, Swaziland and Zimbabwe which means that, in the case of the UK and the US, inheritance tax payable in South Africa can typically be reduced by the estate duty due in those countries. Depending on the value of the assets in the US and UK, the rates can be as high as 40%, which is much higher than the SA estate duty rate, even after a credit has been provided in SA against the SA estate duty liability.
You can nominate beneficiaries in an offshore wrapper issued by a South African insurer. As a result, the wrapper will not be subject to the normal administration processes of the deceased estate. This means you don’t need an offshore will or testament, nor are you required to obtain foreign probate, to deal with the offshore wrapper, as is normally the case with assets you hold personally. In most instances, these processes are both costly and time-consuming. Holding the investments inside the offshore wrapper also avoids any potential foreign inheritance tax being levied on those assets.
Furthermore, the investments in the wrapper can continue in those beneficiaries’ names or, they can elect to receive the investment proceeds from the wrapper on your death.
Before you decide to invest in an offshore life wrapper, start by determining the appropriate offshore portfolio to meet your investment objectives. It’s a good idea to choose an investment administration platform where access to research and a range of offshore investment solutions are available. Your financial adviser is well-placed to determine the best solutions based on your tax and estate planning requirements.