Situs Tax & Probate – Forewarned is Forearmed

David Noon
 on 
February 11, 2021
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Investment

Investors are currently facing unprecedented times with the current pandemic. It’s flipped markets upside down, impacted interest rates and wreaked havoc on the way we conduct business.

In addition to the many challenges presented by the pandemic, many investors reside in countries where the domestic economic situation is challenging, the political environment is unstable, or the domestic currency is volatile. With declining personal income tax, pressure from both trade unions and state-owned enterprises as well as the impact of Covid-19 on the public purse, South African investors will be eagerly awaiting the Finance Minister’s delivery of the 2021 National Budget Speech at the end of February.

When do investors need to consider international tax?

When South African  investors accumulate wealth, they often start to look for opportunities to invest a portion of this wealth outside of the South African market. This allows them to access harder, more stable currencies in jurisdictions that have strong regulatory regimes and established legislation.

This is a natural step as they seek to diversify risk away from their home market, exploit more opportunities for growth and stability and potentially set up a pot of wealth offshore that can be tapped into should they need to leave their home country.

Whilst this may seem daunting, it is in fact relatively straightforward to achieve. However, without careful planning, it can also be quite easy to unwittingly leave yourself open to some expensive international tax issues. An example of this is Situs.

Situs tax

In law, the situs of property is where the property is treated as being located for legal purposes.

Property is not just physical property but also investments, including shares, collective investment schemes and structured products. So, investments incorporated in the United States, or in the United Kingdom, are considered situs assets and as such will attract inheritance tax (IHT) in the UK and federal estate tax (FET) in the US. This is commonly known as situs tax.

It should be noted that situs is not just restricted to the UK and the US but it is these locations, which often form the bulk of an offshore investment portfolio for South African investors.

Situs can create not only unnecessary tax liabilities on a person’s demise, but it can also create complex international tax reporting during a person’s lifetime, particularly where the assets are held in a trust.

Probate

Another international tax issue to consider is Probate, a tax which raises itself as an issue when heirs or will executors seek to take control and distribute the wealth from an estate. This is because probate is usually required in order to complete the administering of the estate and for the transfer of ownership from the deceased to the heir to take place.

How does probate work?

Probate is a problematic issue because it costs money (it usually requires a lawyer). Secondly, it takes time, generally a lot of time. Finally, probate normally needs a lot of patience with form-filling, record keeping and administration. All of this can be particularly challenging at what is typically a difficult time for a family coming to terms with a bereavement.

Avoiding probate and situs

While trust and company structures, as well as offshore life assurance policies, can offer some relief from both the issue of probate and situs, they often come with drawbacks. The potential disadvantages include restricted investment choice, additional costs, an additional layer of communication, additional servicing complexity and other challenges.

However, there is potentially a more straightforward solution to use in connection with a client’s required investment strategy, which can help in solving situs issues, provide tax efficiency and assist to minimise costs, such as legal fees.

Please get in touch with us here so that we can discuss the solutions available to you, including Kinesis, a one-stop flexible investment contract and platform solution via CIG.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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