Offshore property and your estate
The complex world of will planning for offshore property owners22nd Feb 2021
As the local economy continues to wobble, more and more South Africans are looking overseas to build and diversify their wealth. Property is an increasingly attractive part of that offshore investment picture. But whether it’s a small rental apartment in Portugal or a seaside villa in Zanzibar, that offshore property needs very careful attention when it comes to estate planning.
The case for offshore property
Anthony Palmer, Group Commercial Director at Carrick Wealth Management, summed it up perfectly in a recent webinar: ‘Property is a key building block in an investment portfolio,’ he said. ‘I personally believe that the investment case for buying property has never been stronger.’
Why would you want to own a brick-and-mortar property in a developed market? Palmer made a compelling case: ‘Firstly, you can use the power of leverage to boost your returns, especially in the low interest rate environment we’re currently experiencing,’ he said. ‘Secondly, our clients love retaining control, which means being able to renovate to rent or sell according to your personal wishes. Thirdly, you generate stable and consistent cash flow in a hard currency. And finally, it is obviously a great inflation hedge. Property is a real asset that retains value independent of any paper currency’s nominal value.’
Where there’s a will …
But owning an offshore property can cause complications with your estate planning, and what starts out sounding like a simple exercise can very quickly turn into a hot mess of local laws, conflicting wills and expensive (sometimes double) taxes.
Like any assets offshore, your international property can be included in your South African will; but some EU countries have forced heirship rules that limit who your assets can be left to – so, while you might want to leave your cottage in Europe to your pet cat, local laws might require you to leave it to your (human) children instead. But even then, the European Succession Regulation allows you to choose between the succession law of the country in which the property is situated or the law of your own country of nationality.
As we said: it’s complicated … and you will definitely need to consult an expert.
Rozanne Heystek-Potgieter of Brenthurst Wealth warns that, ‘if you decide to draft a foreign will, ensure that it is not done in isolation of your South African executor. Multiple wills must be carefully drafted in order to not revoke each other, to avoid obvious disastrous effects. It is best to consult a fiduciary services specialist who can provide guidance on estate planning and drafting wills, and ensure synergy between offshore investment strategy and estate planning goals.’
Eric Jordaan of Crue Invest built on that in a recent statement, saying that unless otherwise specified, your South African will covers your worldwide assets. ‘Although,’ he added, ‘there may be instances where you require a foreign will – also known as an offshore will or concurrent will.
‘The main reason for creating a foreign will is to avoid delay in winding up your estate,’ Jordaan wrote, ‘and many South Africans choose to draft a separate will for their foreign assets to ensure a more efficient administration process, especially where the foreign country (such as Spain) stipulates a certain time frame in which the estate must be wound up. Having a separate will means that your South African estate can be wound up simultaneously with your overseas assets, and this would naturally be to the benefit of your loved ones.’
Death and taxes
In all this talk of complications and uncertainty, it’s worth considering life’s two great certainties: one is that sombre event we’ve been talking about; the other is taxes. As you explore your offshore wealth options, you’ll soon learn that different countries also have different inheritance tax laws.
As a South African, your foreign investments form part of your South African estate and will be subject to local inheritance tax (here we call it estate duty). That tax will be determined by the value of the assets, and whether double taxation agreements exist between South Africa and the other country.
Some countries will require you to pay estate duties on assets registered in that country, even if you’re not a resident. You could try to claim a foreign tax credit to limit the taxes your estate will have to pay in South Africa, but again it’s a legal and regulatory minefield. If you give up and try to sell the property to simplify matters, you’ll then be subject to capital gains tax. ‘But, once again, capital gains differ from country to country, so the need to seek professional advice cannot be stressed enough,’ says Brad Bendall, Palmer’s colleague and Group Sales Director at Carrick.
The differences in estate duty from country to country can be quite pronounced, as Dale Irvine of Sentinel International points out.
He says that in South Africa, estate duty ‘is calculated at 20%, after an allowable deduction of R3.5 million against the dutiable value of the estate. If the dutiable estate is worth more than R30 million, the estate duty increases to 25%. Transfer between spouses is exempted, so the allowable deduction for two spouses is R7 million.’ (Remember, though, that your offshore property will be included in this calculation.)
‘In the UK, by comparison, inheritance tax is 40%, but only if the estate exceeds a £325,000 (R6.3 million) threshold,’ Irvine continues. ‘Below this threshold, there is no inheritance tax. Transfers between spouses are exempted, so you can double the threshold to £650,000. In the USA […] the threshold is $60,000 with no relief for transfers to spouses, and the tax rate starts at 18% and makes its way to 40%.’
Still with us? It can be hard to keep up with the complexities of how offshore properties fit into your estate planning, but the benefits – as outlined at the top by Carrick’s Anthony Palmer – far outweigh the small (and entirely necessary) inconvenience of speaking to a consultant or adviser to ensure that your affairs – both local and international – are in order.