Comprehensive estate and tax planning is essential to preserve and transfer wealth across generations, particularly when you’re retired in South Africa and some or all of your children or other beneficiaries are no longer living in the same country, having moved overseas. The process comes with complexities, including tax residency, local and offshore trust structures, and punitive taxes imposed by certain jurisdictions. How can you ensure a smooth and accessible legacy for your loved ones?
Cessation of SA Tax Residency
Many South Africans living abroad mistakenly believe that if they left the country several years ago, they have automatically forfeited their South African tax residency and no longer have to pay taxes in South Africa.
There is also a misconception that funds can be transferred abroad, or an inheritance received, without obtaining a tax clearance certificate. However, to ensure a seamless transfer of intergenerational wealth without complications, beneficiaries must regularise their affairs with the South African Revenue Service (SARS).
If they have not formally recorded the cessation of their South African tax residency with SARS, they will first need to obtain the necessary clearances before externalising their inheritance offshore. This process can be both cumbersome and costly.
To formally cease tax residency, individuals must inform SARS by completing the Registration, Amendments, and Verification Form (RAV01) on eFiling, specifying the date they ceased to be tax residents. This formal declaration is essential; without it, individuals remain liable for South African taxes on their worldwide income.
Once beneficiaries have formally ceased their South African tax residency and settled any exit taxes (including capital gains tax), they will no longer be taxed in South Africa on their worldwide income but only on income sourced locally, such as rental income.
South African Tax Structures
Estate planning becomes even more complex when local trusts are involved. Many South Africans are beneficiaries of trusts established by parents or grandparents for intergenerational wealth preservation, often without realising it.
Transparent communication between generations is vital, as financial consequences can be significant when wealth transfer decisions are made without beneficiaries’ full awareness.
Key Considerations for South African trust Beneficiaries Abroad
- – As of 1 March 2024, the South African Income Tax Act has changed the treatment of non-resident beneficiaries of trusts. The conduit principle now only applies to South African tax residents. If a South African trust distributes income or capital gains to a non-resident beneficiary, the trust itself will be taxed at a rate of 45%, instead of the tax liability passing to the beneficiary.
- – If offshore beneficiaries require financial assistance, trustees must carefully consider the tax consequences before authorising distributions.
Punitive Taxes in Foreign Jurisdictions
Different countries impose their own taxes on beneficiaries receiving trust distributions from foreign trusts, including South African trusts. Seeking expert advice is essential before making any distributions.
Country-specific tax considerations
- Australia: If an Australian resident beneficiary receives a capital distribution (current or historic capital gains) from a South African trust, this amount must be included in their assessable income for Australian tax purposes.
- United States: If a US tax-resident beneficiary (such as a US citizen or green card holder) receives a distribution from a foreign trust, the entire amount could be taxable by the US Internal Revenue Service (IRS).
- United Kingdom: The UK tax rules on trust distributions are complex. If trustees fail to maintain clear records of income and gains separately, additional taxes may arise for UK beneficiaries.
Compliance and Reporting Requirements
- US Foreign Accounts Tax Compliance Act (FATCA):
- – Trustees or financial institutions managing trust assets must report to SARS if a US resident or green card holder is a beneficiary.
- – SARS, in turn, reports this to the IRS.
- – US beneficiaries may also be subject to Foreign Bank Account Report (FBAR) requirements, meaning they must declare offshore funds to the IRS.
- Common Reporting Standard (CRS):
- – The details of trust settlors and beneficiaries must be recorded.
- – This information is accessible to CRS member countries, including South Africa, Mauritius, the Channel Islands, Australia, and the UK.
Alternative Wealth Transfer Options
Aside from trusts, another option for passing on wealth is through direct bequests in a last will and testament. However, this too comes with tax implications:
- – If beneficiaries have not ceased their South African tax residency with SARS, they can only externalise their inheritance after obtaining tax compliance status from SARS.
Final Thoughts
Intergenerational estate planning for offshore beneficiaries is fraught with complexities, and there is no one-size-fits-all solution. Each family’s situation is unique, requiring tailored estate plans.
With the recent changes to South African tax laws, particularly the taxation of trust distributions to non-residents, expert advice is more critical than ever. Understanding these updates will help beneficiaries and trustees avoid unnecessary tax burdens and ensure a smooth wealth transfer process.
Seeking professional advice is crucial to ensure a seamless transfer of wealth to the next generation.
Need expert advice?
At Oasis Life, we care about keeping seniors up to date with important information and access to industry experts.
For guidance on estate planning, protecting intergenerational wealth and ensuring a smooth and compliant inheritance for your adult children if they’re South African expats who emigrated, contact:
📌 Shaun Jardine Portfolio Manager | Sanlam Private Wealth
- 📧 Email: shaunj@privatewealth.sanlam.co.za
- 📞 Contact: +27 84 027 0000
📌 Stanley Broun Portfolio Manager | Sanlam Private Wealth
- 📧 Email: stanleyb@privatewealth.sanlam.co.za
- 📞 Contact:+27 84 673 2955
