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Inheriting Abroad: Understanding Tax Considerations and the Importance of Expert Opinions

Inheriting from abroad can bring about unique challenges, particularly when dealing with the new tax legislation. As more South Africans embark on journeys overseas, seeking adventure or better opportunities, the issue of inheriting while living abroad becomes increasingly relevant.

Before we dive into the complexities, it’s essential to understand the distinction between SA taxpayers and non-tax residents. A SA taxpayer is someone who must pay or disclose income streams in South Africa, regardless of their tax residency status, while a non-tax resident only pays tax on their South African-sourced income and asset base. On the other hand, a “SA tax resident” is someone who has to pay tax on their worldwide income and worldwide asset base in SA. This differentiation plays a significant role in determining the tax obligations when inheriting from abroad.

In January 2021, the Taxation Laws Amendment Act 23 of 2020 was enacted, eliminating the distinction between residents and non-residents for exchange control purposes. This effectively removed the process of financial emigration, which involved formally informing the South African Reserve Bank (SARB) of a change in residency status. From 1 March 2021, South African exchange control residents no longer need to apply for emigration approval through FinSurv. Instead, they must obtain a Tax Compliance Status (TCS) from the South African Revenue Services (SARS) to confirm their non-resident tax status. To obtain a TCS, emigrants must complete a SARS TCR01 ‘Emigration’ application form. Without a TCS, their authorized dealer (bank) will be unable to transfer funds offshore. It is important to note that a TCS is only issued to tax-compliant individuals aged 18 and older.

Several factors are involved in the transfer of funds for emigrants who cease to be tax residents. Those transferring less than R1 million per individual per calendar year do not require a TCS, while those transferring between R1 million and R10 million abroad cannot remit the funds without a TCS. Emigrants transferring more than R10 million undergo a stringent verification process by SARS, requiring approval from FinSurv to assess risks related to anti-money laundering and countering terror financing regulations. All transfers of assets by individuals who cease to be tax residents are transferable, such as lump sum benefits from retirement funds, provided the individual remains a non-tax resident for at least three consecutive years. The treatment of natural person emigrants and natural person residents is now the same, eliminating the concept of a ‘blocked funds account’ that controlled an emigrant’s remaining assets. Income and capital distributions from inter vivos trusts and pre-inheritance gifts may also be transferred abroad.

While these changes simplify certain aspects of exchange control, they have resulted in a more intricate treatment of tax residency, making it challenging for non-residents to prove their non-residency status. It is important to seek professional guidance to navigate these new regulations.

In South Africa, beneficiaries are not required to pay tax on assets received from an inheritance. Estate Duty, currently at rates of 20% on the first R30 million and 25% on the dutiable value above R30 million, is paid by the estate of the deceased. The executor of the deceased estate typically settles the Estate Duty with SARS before distributing the remaining funds to the beneficiaries. However, taxes may still be applicable on the inheritance in the country where you reside, leading to the issue of double taxation.

To navigate double taxation effectively, we strongly recommend seeking professional advice. We understand the complexities and frustrations that come with inheriting while living overseas. It can be overwhelming to face these challenges without the presence of family and friends during a time of grief. But remember, you are not alone.

If you have any questions or need further clarity on any of the points discussed regarding inheriting from abroad and the associated tax considerations, we encourage you to seek advice from your tax consultant.