Optima Brokers

Specialist Financial Planning

Estate Duty and Capital Gain Tax on Offshore Assets

Jun 27, 2015

Madelein Marais
LLB, Adv PG Dip Fin Plan, H Dip Tax.
Legal Adviser Specialist
Broker Distribution : Cape Town

Introduction

Many South Africans have invested in offshore property in recent years but neglected to consider the tax effect from an estate planning point of view, as it is often assumed that offshore assets will not form part of a resident’s estate for estate duty purposes. In South Africa residents are taxed on worldwide income and capital gains and estate duty is levied on the worldwide assets of ordinarily residents including offshore assets. Therefore, it is essential to consider the amount of estate duty and capital gain tax (hereinafter referred to as “CGT”) payable on death with regards to offshore assets, as this will have an effect on the liquidity of the estate.

The South African tax system and estate duty

South Africa has a “residence” basis of tax. A resident is a person who is “ordinarily resident” in South Africa as defined in section 1 of the Income Tax Act1. In terms of section 3 of the Estate Duty Act2, “the estate of any person shall consist of all property of that person as at the date of his death and of all property which is deemed property of that person at that date”. It is therefore clear that estate duty has an impact on offshore assets as well as assets situated within South Africa. In terms of section4 (e) of the Estate Duty Act3, property situated outside South Africa will attract estate duty unless certain exclusions exist. These exclusions are the following. Should deceased have acquired the property:

  • before he became ordinarily resident in the republic for the first time, or
  • after he became ordinarily resident in the Republic for the first time –
    • by donation if at the date of the donation the donor was a person (other than a company) not ordinarily resident in the republic ; or
    • by inheritance from a person who at the date of his death was not ordinarily resident in the republic; or
  • out of the profits and proceeds of any such property proved to the satisfaction of the Commissioner to have been acquired out of such profits or proceeds4.

Capital Gains Tax

Its terms of paragraph 40 of the Eighth Schedule of the Income Tax Act5 a deceased is deemed to have disposed of his assets for an amount equal to market value on the date of his death6. This will give rise to a capital gain in the deceased’s hands immediately before his death. When dealing with assets acquired or disposed of in a foreign currency, it is necessary to determine the capital gain or loss in rands as stated in paragraph 43 of the Eighth Schedule. Paragraph 43 prescribes the conversion rules and prescribes when such conversion should take place and the appropriate exchange rate. Paragraph 43(1) is applicable where the expenditure derived from and proceeds incurred are in the same foreign currency7. Paragraph 43(1A) applies where the expenditure derived from and proceeds incurred are in different currencies8.

Capital gains and losses are determined as follows in terms of paragraph 43(1):

  • Determine the capital loss in foreign currency
  • Covert the foreign currency capital gain or loss into rands at the date of disposal by applying the average exchange rate for the year of assessment in which the asset was disposed of (or deemed to be disposed of), or by applying the spot rate at the date of the disposal or deemed disposal9.

Proceeds in foreign currency (say) £100 000

Base cost in that currency (say) £40 000

Capital gain £60 000

Translate into local currency either at average rate for the year or at spot rate on the date of disposal:

£60 000 x R18,10(say) R1 086 000

Paragraph 43(1) of the Eight Schedule does not make provision for the currency fluctuation between the date the expenditure is incurred and the date of disposal of the asset10. If the rand declines it will benefit a person holding a foreign asset as the base cost is converted into rands at a lower exchange rate ruling at the date of disposal which results in giving more rands as opposed to a higher rate at the date the expenditure was incurred11.

If a resident owns immovable property outside South Africa, for example a holiday home and this asset is sold out of the residents foreign estate, if the currency in which the expenditure was incurred and the currency in which the proceeds were received or accrued differ, then paragraph 43(1A) of the Eight Schedule will apply.

Mr A purchased a holiday home in France for R750 000 in 2006. Mr A died in November 2013 and in November 2013 the asset was sold out of his foreign estate for €200 000. He did not use it as a permanent establishment.

Proceeds translated to Rands at average rate for the 2013 tax year (say) R1 800 000

Base cost in local currency (R750 000) Capital gain per paragraph43(2)(a) R1 050 000

Note that with this translation only the proceeds need to be converted as the base cost is already in local currency. The proceeds must be converted at the average rate for the year of assessment during which the asset was sold. With the result being that tax is based on the currency gain or loss as well as on the real gain or loss12.

Where an asset is bought in one foreign currency, and sold in another, the capital gain or loss is determined in the foreign currency of disposal by using the average exchange rate for the year and then converted to local currency, again at the average exchange rate.

Mr A purchased a building in the UK for £25 000 in 2010. Mr A died in November 2013 and in November 2013 the asset was sold out of his foreign estate for $40 000. He did not use it as a permanent establishment.

Proceeds in the foreign currency of sale $40 000

Translate the base cost at the average exchangerate for the year of assessment during which the asset was bought

£25 000x $1.43(say)
($35 750)

Capital gain in $
$4 250

Proceeds in the foreign currency of sale $40 000

Translate the base cost at the average exchangerate for the year of assessment during which the asset was bought

£25 000x $1.43(say)
($35 750)

Capital gain in $
$4 250

Translate the capital gain to local currency at the average rate for the year of assessment during which the asset is sold. $4 250 x R10, 50(say)

R44 625

The effect of Double Tax Agreements (DTA’s) and estate tax treaties

When a resident has an offshore asset, cross-border taxation is involved and the impact of Double Tax Agreements (hereinafter referred to as DTA’s) and estate tax treaties should be considered. It is possible that estate duty may arise in both the foreign country where the assets are situated as well as South Africa, leading to double taxation. Estate treaties should be taken into account when determining whether the deceased will be liable for estate duty in South Africa or in the country where the asset is situated. DTA’s and estate tax treaties make provision for the allocation of the primary right to tax in the country where the income is sourced and grant relief in the resident country by either exempting the income or crediting foreign tax paid against the South African tax charge13.

Example

Mr B, a South African resident died 23 June 2014 and owned an apartment in the UK. The value of the property is R8 000 000.

In terms of the estate tax treaty between SA and the UK14 estate duty will be levied in terms of article 6(1) of the treaty and immovable property may be taxed in the contracting state in which such property is situated. 40% inheritance tax may be levied on the property situated in the UK. However in terms of the Estate Duty Act15, 20% estate duty will be levied on the same property in South Africa as the deceased estate is liable estate duty for all property or deemed property.

In terms of article 12 of the estate tax treaty between SA and the UK16 where a contracting state imposes tax on the property, the former contracting state shall allow so much of its tax as is attributable to such property a credit equal to such amount of the tax imposed in the other contracting state in connection with the same event as is attributable to such property.

If the UK levies 40% inheritance tax and South Africa levies 20% estate duty, the relief will be limited to 20% as this is the tax imposed in the South African deceased estate. The effect would be that 20% inheritance tax will be levied in the UK and 20% estate duty in South Africa17.

The deceased estate of Mr B may be subject to R1 600 000 inheritance tax in the UK (applicable if the UK situs assets are in excess of £325,000, other exclusions and deductions not taken into account) and R1 600 000 estate duty in South Africa (excluding exemptions and deductions) with the effect the estate will be liable for 40% “estate tax liability” on the offshore property.

South Africa and the UK have also entered into a DTA and CGT will be levied in terms of article

13(5) of the DTA18. It terms of this “gains from the alienation of any property other than referred to in paragraph 1, 2, 3 and 4 of this Article shall be taxable only in the contracting state of which the alienator is a resident”. The deceased estate of Mr B, as a non-resident of the UK, will currently only be liable for CGT in South Africa with regards to the offshore property. This is however all about the change in April 2015 with the extension of UK CGT to residential property owned by non-resident individuals. South Africans now only pay 13.3% on the gains of property sold in the UK. From April 2015 they will pay 28% in the UK and 13.3% in SA, but due to the DTA relief they will only pay CGT in the UK because of its higher rate19.

No DTA or estate tax treaty

When there is neither a DTA nor an estate tax treaty with the country where the assets are situated, section 16(c) of the Estate Duty Act20 and section 6quat of the Income Tax Act21 will apply. In terms of section 16(c) of the Estate Duty Act where a deceased estate is subject to estate/inheritance tax in a foreign country, such tax will be deductable from any estate duty chargeable under the Estate Duty Act22. This deduction is however limited to the amount of South African estate duty payable in respect on the offshore property. However if the deceased resident owned property in a country which has a DTA with South Africa, the relief will be available in terms of the DTA and the section 16(c) rebate will not be available23.

Section 6quat is aimed at providing relief against double tax by allowing, as a rebate against South African tax, any foreign tax paid (converted to rands) in respect of foreign income included in South African taxable income (section 6quat(1))24. The purpose of the section 6quat rebate is to prevent double taxation on foreign source income and the rebate is limited to the South African tax attributable to the foreign source income25. In terms of section 6quat(1)(e) any capital gain as contemplated in section 26A from a source outside the Republic will give rise to a rebate. Section 6quat(1) is however subject to section 6quat(2) which provides that the rebate shall not be granted in addition to any relief provided under a DTA26. It may however be granted in substitution for DTA relief should the wording of the DTA allow for it.

Conclusion

It is clear from the above that careful consideration should be given to the effect estate duty and CGT will have on estates where offshore assets are involved as this can affect the liquidity of the estate. The worst case scenario would be that a South African resident can be liable for estate duty and CGT in both South Africa as well as the country where the assets are situated. However the existence of several DTA’s and estate tax treaties as well as the domestic provisions against double taxation of section 6quat of the Income Tax Act27 and section 16(c) of the Estate Duty Act28 will limit the impact thereof to a certain extent.

Bibliography

Income Tax Act 58 of 1962

Estate Duty Act 45 of 1945

Phillip Haupt,Notes on South African Income Tax (2013)

SARS 2003: New convention between the government of the Republic of South Africa and the government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of Double Taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains.

SARS 1978: Convention between the Government of the Republic of South Africa and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estate of deceased persons and on gifts.

C. Bornman, 2010: Estate Planning: The impact of estate duty and capital gains tax on offshore assets.

Amanda Visser, UK capital gains tax ‘is bad news for SA’: BusinessDay BDlive, 8 January 2014.


1 58 of 1962; Phillip Haupt,Notes on South African Income Tax 25 (2013)
2 45 of 1955
3 Id.
4 Id.
5 58 of 1962
6 Phillip Haupt,Notes on South African Income Tax 856 (2013)
7 Income Tax Act 58 of 1962; Phillip Haupt,Notes on South African Income Tax 922 (2013)
8 Id.
9 C. Bornman, Estate Planning: The impact of estate duty and capital gains tax on offshore assets, 32 (2010)
10 Id.
11 Id.
12 C. Bornman, Estate Planning: The impact of estate duty and capital gains tax on offshore assets, 32 (2010)
13 Id. at 63
14 Convention between the Government of the Republic of South Africa and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estate of deceased persons and on gifts.
15 45 of 1955
16 Id.
17 C. Bornman, Estate Planning: The impact of estate duty and capital gains tax on offshore assets, 70 (2010
18 New convention between the government of the Republic of South Africa and the government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of Double Taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains.
19Amanda Visser: UK capital gains tax ‘ is bad news for SA’
20 45 of 1955
21 58 of 1962
22 45 of 1955
23 C. Bornman, Estate Planning: The impact of estate duty and capital gains tax on offshore assets, 64 (2010)
24 Phillip Haupt,Notes on South African Income Tax 454 (2013)
25 Id.
26 Phillip Haupt,Notes on South African Income Tax 462 (2013)
27 58 of 1962
28 45 of 1955

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