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Death taxes and offshore investing

Your portfolio is offshore and invested in global shares (dominated by US-listed stocks), there are a few funds in the portfolio and a small cash allocation. After your death, your heirs inherit 60% of what the portfolio was valued at on your death – they have lost a huge amount of your wealth.

We acknowledge that this is a greatly simplified example, but the essence and effect are accurate. Situs taxes, paid on your UK- and US-domiciled assets (including cash, shares, physical property, and shareholdings in non-listed companies), are responsible for the loss of wealth. While paying tax is an inevitability, one is not required to pay more than necessary and is entitled to structure one’s affairs to pay the lowest amount of tax. In the example above, an appropriate investment structure would have dramatically reduced the tax bill and left the heirs with a value far closer to what the original investor saw before their death.

As an SA-based investment manager, we are seeing more and more of our clients externalising their money and investing in global assets. While we are hugely supportive of the idea of “living in the sun and investing in the shade”, we are profoundly aware of the risks associated with buying these types of assets. There are many risks and issues that one needs to address when investing outside of SA. For this article, however, we are going to focus on the inheritance and estate taxes levied on so-called “situs assets”.

‘Situs’ is Latin for ‘position’ or ‘site’. In the context of investing, the word is used to refer to taxes levied against assets deemed to be domiciled in regions such as the UK and the US. Situs taxes are inheritance and estate taxes (hence the reference to “death taxes”) charged by the country in which the assets are deemed to be situated. The SA equivalent tax is estate duty.

“Situs assets” are thus the assets on which “situs taxes” are charged*. While listed equities are an obvious inclusion in the group of assets referred to as ‘situs assets’, investors should keep in mind that assets from cash to listed property are also included, as are shareholdings in unlisted companies.

Local investors that have invested in these assets in countries such as the UK and the US need to be aware of the implication of these taxes on their wealth and should take steps to ensure that they structure their financial life in such a way as to reduce the amount of tax paid on death. For example, a SA investor with investments in listed US equities would pay up to 40% in situs taxes on death. This is double the SA estate duty rate of 20%. Further, US assets do not receive a spousal exemption (as would apply in SA) and so those assets would be taxed on the death of the first spouse and again on the death of the second – an effective double taxation of up to 40%.

The introduction of Common Reporting Standards (CRS) has dramatically increased the ability of tax authorities around the world to collaborate and share information. Under this regime, it is even more important to ensure one’s affairs are appropriately structured.

Offshore trusts are a popular, if at times expensive, means of ensuring one’s wealth is not punitively taxed. With recent changes to looping structure regulations, SA investors can now enjoy the situs tax protection offered by an offshore trust and can have their local, SA assets held in the same structure. The way assets, or the ownership of assets, are moved into an offshore trust is complex but there are ways in which SA investors can externalise the ownership of their local assets without triggering unnecessarily severe tax consequences.

A more accessible, easier to set up and often cheaper means of reducing one’s exposure to situs taxes is to house investments in a life wrapper. Investors can appoint beneficiaries of the investments who inherit the investment on death. The investments thus pass directly to the heirs and are not caught up in the winding up of the investor’s estate. There are also several tax benefits to the structure during the life of the investor.

Appropriate structures, such as offshore trusts and life wrappers, ensure that taxes owing on death are paid at the lowest possible rate. With each structure and each jurisdiction having its nuances, engaging with an appropriately informed advisor is essential.

Adding to the complexity of jurisdictions and structures is the fact that each investor’s financial life is unique. It is essential that your advisor takes the time to intimately understand your unique situation. A one-size-fits-all, blanket solution is extremely unlikely to be appropriate. Anchor has a highly skilled and experienced team that can assist our clients with structures, both local and offshore. Appropriate structures not only protect against punitive death taxes and the efficient transfer of assets to heirs but can also offer tax and estate planning benefits during one’s life. Speak to your Anchor advisor or contact us at invest@anchorcapital.co.za for more information.

*UK assets over the value of GBP325,000.00 are subject to inheritance tax of up to 40%. US assets over the value of US$60,000.00 are subject to estate tax of up to 40%.



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WEBINAR | The Navigator – Anchor’s Strategy and Asset Allocation, 2Q24

Anchor CEO and Co-CIO Peter Armitage will host the webinar, provide an introduction to current global and local market conditions and give his thoughts on offshore equities. Together with Head of Fixed Income and Co-CIO Nolan Wapenaar, Pete will also discuss Anchor’s strategy and asset allocation for 2Q24, focusing on global equities and bonds. In addition, Fund Manager Liam Hechter will provide insights into local equities, highlighting some investment ideas; Global Equities Analyst James Bennet will discuss Ferrari and give an update on Tesla, and finally, Analyst Thomas Hendricks will participate in a Q&A with Peter, explaining the 10-year US Treasury to attendees.