The word ‘situs’ is used in financial and legal jargon as if we all understand its meaning. But do we, and what are the implications for us as SA residents, or any global resident, for that matter? This article explains what situs means and why it is important to know what tax will apply to your offshore assets.
Situs and situs tax: Understanding taxation on non-resident assets
The concept of situs holds significant importance, especially when determining taxes associated with non-residents in a specific jurisdiction. Currently, we have clients spread across the globe, but often, the UK and the US crop up as destinations where assets (listed assets, bonds, property) are held. This article aims to explain situs and situs tax, focusing on the US and the UK, including the tax rates applicable to non-residents in these countries. Obviously, other jurisdictions also have situs tax, and we are more than happy to discuss these with you.
Situs
Situs refers to the location or position where an asset is located for legal purposes. It determines the jurisdiction where the asset is considered to be located and the relevant laws regarding its taxation.
Situs tax
Situs tax (also known as source-based taxation) is a form of taxation imposed on assets based on their location rather than the taxpayer’s residence. It is commonly applied to assets such as property, listed shares, and cash, BUT it depends on the laws governing the jurisdiction in which the asset is held.
Situs tax helps governments generate revenue from economic activities within their borders, so it is important to all jurisdictions!
In this article, we have only concentrated on how situs tax works in the abovementioned jurisdictions.
US situs tax rates for non-residents
In the US, non-residents are subject to specific tax rates on income derived from US sources, including certain types of assets in the country. The key considerations for US situs tax rates for non-residents include:
- Property: Non-residents are subject to a flat tax rate of 30% on gross rental income derived from property located in the US.
- Dividends and interest: Non-residents may be subject to a 30% withholding tax on certain types of investment income, including dividends and interest from US sources. However, tax treaties between the US and other countries may lower the applicable tax rate. The W-8 BEN form a client completes allows them to declare that they are not US citizens and alerts the US Internal Revenue Service (IRS) that a double tax agreement (DTA) should be applied to these US assets.
- Capital gains: Non-residents are generally not subject to US capital gains tax on the sale of personal property. However, gains from the sale of US real estate interests by non-residents are subject to taxation under the Foreign Investment in Real Property Tax Act (FIRPTA). Persons purchasing US real property interests from non-residents must withhold a percentage of the amount realised on the disposition.
- Estate tax: Non-residents are subject to US estate tax on certain assets with a US situs, such as real estate and listed shares. The exemption amount is US$60,000, and any amount above that is taxed on a sliding scale with rates ranging from 18% to 40%. For a South African resident it is important to note that the differential between US estate duty (maximum 40%) and SA estate duty (maximum 25%) cannot be refunded. Should the executor of an estate not declare the assets to the IRS, the IRS holds the executor personally liable for a number of years after the deceased’s death.
UK situs tax rates for non-residents
In the UK, non-residents may also be subject to taxation on certain assets with a UK situs. The tax rates and rules vary depending on the specific asset and the individual’s residency status. The essential considerations for UK situs tax rates for non-residents include:
- Real estate: Non-residents who own residential property in the UK are subject to Non-Resident Capital Gains Tax (NRCGT) on gains arising from the disposal of UK residential property. The tax rates for non-residents are aligned with those applicable to UK residents, currently set at 18% for basic-rate taxpayers and 28% for higher-rate taxpayers.
- Inheritance tax: Non-residents may be liable for UK inheritance tax on assets with a UK situs, such as real estate, listed shares, and cash. The inheritance tax rates for non-residents are the same as those for UK residents, with a standard rate of 40% on the value of the taxable estate exceeding the estate duty exemption amount (currently GBP325,000). Bear in mind a similar tax applies to offshore trusts holding assets in the UK and is applied on a ten-year cycle.
- Income tax: Non-residents are generally only liable for UK income tax on income derived from UK sources. The tax rates for non-residents vary depending on the type of income, with different rates applicable to dividends, interest, rental income, and other forms of income generated from UK sources.
Conclusion
In conclusion, situs and situs tax play a crucial role in determining the tax treatment of assets held by non-residents in a specific jurisdiction. Understanding the situs of an asset helps taxation authorities establish the taxable connection and apply relevant tax laws and rates accordingly. For example, in both the US and the UK, non-residents may be subject to taxation on certain types of assets with a local situs, including real estate, listed shares and investment income. The applicable tax rates and rules vary depending on the specific jurisdiction and the type of asset involved, highlighting the importance of seeking professional tax advice to ensure compliance with relevant tax laws and regulations. DTAs are important regarding situs tax, and it is necessary to understand the DTA in place for the specific jurisdiction in which assets are held.
If you have any questions or need clarity on situs and its implications, please contact Di Haiden or Kate Trollip for assistance.
