UK AND US SITUS GUIDE

The tax levied in South Africa on deceased estates is commonly known as estate duty. Perhaps not so commonly known is that the tax levied in the United Kingdom (UK) on deceased estates is called and that the tax levied in the United States (US) on deceased estates is called federal estate tax. These are generally levied in the UK and US on assets that are classified as UK or US situs assets, even when these situs assets are owned by non-residents.

Which assets are subject to UK and US situs taxes?

‘Situs’ is Latin for ‘position’ or ‘site’. The situs of an asset is therefore generally the place where an asset is deemed to be located for legal purposes, for example:

• the location of immovable ; • the place where a share register is maintained; or • where a company has been incorporated.

The most important thing is to get specialist advice on your foreign assets

When you own UK and/or US assets, you potentially become liable for taxes in these jurisdictions, including income tax, and estate tax. These taxes can have a significant impact on your long-term outcomes, which is why it is critical to get expert advice about the different ways to acquire foreign assets and structuring your international wealth.

Double-taxation agreements (DTAs) will determine your exact tax liability

Because South Africa has a residence-based system of taxation, South African residents are subject to income tax and estate duty on their worldwide assets. Depending on the assets you own and how you acquired them, you may be subject to taxes in the UK and/or US in addition to South Africa. This is where DTAs come into play.

The purpose of DTAs is to provide relief to taxpayers who own assets in different jurisdictions, ie to avoid as far as possible a scenario where taxpayers pay tax twice on the same asset (in different countries). Generally, the country in which the assets are located have taxing rights. However, the terms of the DTA agreements will determine the exact liability.

South Africa has DTAs with both the UK and the US. Depending on the exact terms of the agreement, you may be able to deduct the tax payment made in the US and/or UK against any tax payable in South Africa.

The table below shows the various types of assets that will be subject to estate taxes in South Africa, the UK and the US as part of deceased estates of persons who are:

• resident in South Africa; and • non-resident and non-domiciled in the UK and/or non-resident in and not a citizen of the US at the time of their death; and • who hold assets in either the UK or US.

Nedbank Ltd Reg No 1951/000009/06. Authorised financial services and registered credit provider (NCRCP16). 1 COUNTRY SOUTH AFRICA UNITED KINGDOM UNITED STATES Unit trusts Subject to ED in SA if the No IHT on UK-authorised Subject to FET in the US if the unit trust is register of unitholders is unit trusts and open-ended- deemed to be US-situs if it is ‘issued by kept in SA. investment companies a domestic corporation’, ie a corporation (OEICs) authorised and (or entity or fund) incorporated in the US. regulated by the UK Financial Conduct Authority (these are ‘excluded assets’ and fall outside the estate of a non-UK domiciliary). Foreign collective Subject to ED in SA Generally excluded from IHT Generally excluded from FET in the US. investment schemes (CISs) (residence-based system in the UK. of taxation). Cash accounts or deposits Subject to ED in SA. Only British pounds held in US bank deposits (ie vanilla bank deposits) in banks a UK bank account will be that generate interest income and that are subject to IHT – foreign held by non-resident aliens will be exempt currencies are excluded from federal income tax and will not be from IHT. subject to FET, provided that the deposit is not connected with a US trade or business.

If funds are held in special deposits (ie specific kinds of money or moveable property is placed in the possession of the bank with an obligation imposed on the bank to return the identical thing deposited) by a US bank in a custodial capacity or in deposits held at US brokerage firms or other institutions that are not considered banks, no exemption will apply.

Deposits held with a foreign branch of a US bank are treated as foreign situs property, whereas deposits with a US branch of a foreign bank conducting business in the US are treated as US situs property and are subject to FET.

Loans made to UK-resident The situs of a loan is the The situs of a loan is the The general rule is that a loan will be US situs or domiciled individuals and place where the loan can place where the loan can if it is a debt obligation of a US person. US-resident individuals be enforced or where the be enforced or where the There are however instances where the debt obligation to pay fails to obligation to pay fails to of a non-resident alien will be “treated as be performed. A loan from be performed. A loan from outside the US”, and hence will not be subject a South African resident a South African resident to FET, such as inter alia, short term debt individual to another South individual to a UK-resident which is generally debt payable 183 days African resident individual or domiciled individual would or less from the date of original issue; bank will be included in ED in SA. therefore be a UK situs asset deposit debt that bears interest; and interest in the UK-resident or domiciled bearing debt if any interest thereon would be individual’s estate and will be eligible for the “portfolio interest exemption” subject to IHT. which is defined as non-effectively connected interest i.e. interest not effectively connected with a US trade or business and the interest is paid on an obligation (debt) that is generally in registered form, as opposed to bearer form, and the obligation must have been issued after 18 July 1984. There are other complicated requirements that will also need to be considered.

Nedbank Ltd Reg No 1951/000009/06. Authorised financial services and registered credit provider (NCRCP16). 2 COUNTRY SOUTH AFRICA UNITED KINGDOM UNITED STATES Assets held by a trust South African-registered International (offshore) trust: International (offshore) trust: The assets trust: The assets are There is a 10-year charge on are generally excluded from FET in the US, generally excluded from UK situs assets. provided there are no beneficiaries resident the founder’s estate. in the US. The value of assets settled on the trust through US property transferred by a non-resident a loan account is generally before death may in certain circumstances pegged. be deemed to have a US situs and therefore be subject to FET. Assets held by an Shares held in an Shares held in international Shares held in international (offshore) international company international (offshore) (offshore) companies that own companies that own US situs assets are company that are owned UK immovable property are generally excluded from FET in the US. by SA-resident individuals deemed to be UK situs assets will be subject to ED in SA. and will be subject to the 10- year charge in the UK. Assets held in an If the international Excluded from IHT in the UK. Excluded from FET in the US. international life policy wrapper is held by a SA (life wrapper) resident individual, it will be subject to ED in SA. Foreign assets acquired A South African investment UK IHT implications, as set out US FET, as set out above, will apply. via an institutional foreign manager registered as an above, will apply. portfolio allowance institutional investor for (commonly called ‘asset exchange control purposes swap’ investments) is authorised to use assets under its management to acquire foreign asset exposure (commonly called ‘asset swap investments’). Under the exchange control regulations, the institution is required to keep control of the assets. The client, however, remains the beneficial owner of the assets and tax, as a general rule, follows beneficial ownership.

HOW TO REDUCE YOUR UK OR US TAX LIABILITY

There are various ways to gain exposure to UK and US assets with a reduced tax liability

1. Obtain exposure to US and UK investment markets by investing in funds (CISs and/or ETFs) that are registered outside the UK and US. Nedgroup Investments, for example, offers investors CIS that are structured as Undertakings for Collective Investment in Transferable Securities (UCITS) and Irish-domiciled. As a result, investors can obtain exposure to US and UK situs assets via these funds without becoming liable for the inherent US and UK situs taxes.

2. Restrict the value of any investments located in the UK and US to the estate thresholds or nil rate bands. The current thresholds are: • UK – £325 000 • US – $60 000

Nedbank Ltd Reg No 1951/000009/06. Authorised financial services and registered credit provider (NCRCP16). 3 3. Hold UK-registered shares via a non-UK holding company and US situs assets (both securities and ) via a non-US holding company. This is complex and requires specialist advice.

4. Invest in UK-authorised unit trusts and OEICs (authorised and regulated by the Financial Conduct Authority) – these are ‘excluded assets’ and therefore fall outside the scope of inheritance tax.

5. Hold UK and US situs assets via an international endowment (insurance) wrapper. The Old Mutual International Investment Portfolio Plus (OMI IP+) offers South African-registered taxpayers (both entities and individuals) a tax-efficient solution to obtaining exposure to US and UK situs assets without triggering the associated estate taxes in the US and UK. The OMI IP+ is a non-UK or US situs asset, even if the portfolio invests in or holds UK or US assets. The investor is therefore not liable for UK or US inheritance tax charges on death.

Choosing the right option for you requires specialist expertise and advice

Considering your circumstances, please contact your wealth manager to discuss the options above in more detail. Our specialist expertise and personal advice can help you make informed decisions about your international exposure.

Administrative compliance with estate taxes in the UK and US UK INHERITANCE TAX (IHT) US FEDERAL ESTATE TAX (FET) • The executor of a non-domiciled individual’s estate comprising • The executor of a non-resident individual’s estate comprising UK situs assets must file an Inheritance Tax Return with Her US situs assets must file a US estate tax return with the Internal Majesty Revenue & Customs within 12 months of the end Revenue Service (IRS) within nine months of the date of death. of the month of death. • Payment of any FET is due within nine months of the date • Payment of any IHT is due by the end of the 12th month after of death. the month of death but interest is charged after six months. Impact of where the assets are custodied

• If assets are custodied in the US, the executor must provide a transfer certificate from the IRS before the assets can be transferred to the deceased heirs. • If assets are custodied outside the US, the custodian will not request a transfer certificate from the IRS but will usually be prepared to transfer the assets when they are satisfied that the probate process in the country of residence and/or domicile has been completed. For this reason, many executors never become aware that the estate has exposure to FET. The risks to this are twofold: a) If the executor does not file and settle FET, the custodian could be held liable for the FET if there is no executor appointed in the US. b) If a custodian has entered into a qualified-intermediary agreement with the IRS, the IRS has the powers to audit the custodian’s records.

Disclaimer: Nedbank Financial Planning is an authorised financial services provider through Nedbank Limited Reg No 1951/000009/06 (FSP9363). Nedbank Limited (NCRCP16) is a registered credit provider.

Nedbank Ltd Reg No 1951/000009/06. Authorised financial services and registered credit provider (NCRCP16). 4