South African Institute Of Professional Accountants
I have been asked to chat tonight about Wills generally and in particular whether local Wills are appropriate for worldwide assets or whether foreign wills applicable to the jurisdiction of the assets in question should be executed. Before getting on to this specific topic, I will summarise some of the critical areas that must be dealt with in wills which in turn will to some extent deal with exactly the questions posed above.
The purpose of Estate Planning is to reduce taxation and for South African purposes, Estate Duty and Capital Gains Tax (CGT). The key to this is for taxpayers as early as possible to transfer appreciating assets out of their estates at the lowest tax cost to Trusts or similar entities. The techniques are not complicated maneuverings involving specially created artificial vehicles but the straightforward use of statutory provisions and no more. What is more pertinent is that if a UK worldwide will is used, then it may be that its provisions do not allow of these deductions being implemented in so far as SA Estate Duty is concerned which is a vital consideration..
2. 4A Deduction
- The first critical component of an Estate Plan consists of an acknowledgement of the provisions of Section 4A of the Estate Duty Act (“the Act”). This provides that as of 1 January 2010, in the Estate of the second dying spouse, a deduction from Estate Duty of the sum of R7 million is allowed being the total of R3,5 million in the Estate of each of the first and second dying. To the extent however, that in the Estate of the first dying and whenever he died that deduction up to the sum of R3,5 million was utilized, then to that extent it is not available in the Estate of the last dying.
- This more or less copied the provisions of for instance the UK Death Duty where a portable deduction is allowed up to £350 000 in each Estate. The position previously was that unless the deduction of R3,5 million was utilized in the Estate of the first dying, it was lost. In other words, unless the first dying bequeathed assets to the value of up to R3,5 million to a person other than his/her spouse, the deduction in the Estate of the second dying was limited to R3,5 million. There are no doubt numbers of Wills drawn to create a special vehicle to ensure that in the Estate of the first dying a bequeathal in terms of 4A was provided for. All this will do now however is ensure that CGT is paid in the Estate of the first dying. It is therefore, I think, of importance that taxpayers/testators be made aware of the downside of the old style Will.
- Of course remember, there must be an Estate for the R3,5 million to apply, i.e. if the first dying was a spouse as defined in the Act, but separated from his/her spouse and living for instance in England, where he/she died, without leaving any assets in South Africa, then there would be no “Estate”.
- The 4A deduction provision further provides that if a person has been married more than once and survives the previous spouses, then he/she can choose which previous deceased spouse’s deduction to use, i.e. obviously the Estate of the spouse which utilized the deduction the least. Alternatively if the Estate is one of a number of wives of a deceased spouse, then in the Estate of that deceased, the amount to be deducted is R3,5 million plus a further R3,5 million less the amount utilized by the deceased husband but divided by the number of wives of that husband! Polygamy complicates death as well!
- The 4A deduction built up from approximately R750 000-00 to R3,5 million over a few years, not to keep up with inflation, but rather to undermine the logic for the creation of Trusts in the minds of the average taxpayer, i.e. why create a Trust when so much is exempt from Estate Duty. Until recently my response to this would have been that you only have to look at how house prices and in particular holiday homes on the coast have risen to know why it was important to start off with those types of assets in a trust. That day will return soon!
- It is interesting to note that the Administration of Estates Act has a territorial limitation. In other words, an Executor is only bound to administer assets situate within the Republic of South Africa. On the other hand, under the Act he/she is obliged to effect payment to SARS of Estate Duty based on the worldwide assets of a South African resident. In other words, if a South African resident dies possessed of property in South Africa and Norway (where she was born) and her Will includes assets on a worldwide basis, there are one of two options available. The Local Executor can obtain probate in respect of the Norwegian assets or alternatively, a Norwegian Executor can seek appointment based on a certified copy of the South African Will together with a Certificate from the South African Executor that the Administration of Estates Act does not oblige him to administer assets outside South Africa. The practical route however is normally adopted namely that the South African Executor will seek and obtain probate off-shore as well, notwithstanding the territoriality of the Administration of Estates Act.
- If the Will is restricted to assets in South Africa, she will die intestate in so far as the Norwegian assets are concerned and probably only a Norwegian Executor can be appointed.
4. Double Death Duty Convention
There are only seven Double Death Duty Conventions between South Africa and other States including Britain and the United States. In essence these provide that the State, in which movable or immovable assets are found, is entitled as of right to levy a Death Duty on such assets. The Estate of a non-resident deceased can then claim a credit in the State of residence for such tax, “the other contracting State”.
Thus taking the last example, the Estate of a Norwegian born resident in South Africa, would pay Estate Duty in South Africa on his/her worldwide assets including those in Norway, but obtain a credit in South Africa for such amounts as were required to be paid relating to assets situate in Norway.
There would be no credit available in Norway because he/she was not a Norwegian resident and therefore not subject to Death Duty in Norway on assets other than those situate in Norway. There is no Double Death Duty Convention with Norway but this crediting occurs because the Act makes provision for the crediting whether or not a Double Death Duty Convention has been entered into of any amount paid in the other contracting State in respect of Estate Duty by a Resident Estate.
5. Foreign Or Local Wills?
- From the above complexities you would probably be no wiser as to what makes sense. In my view if for instance a South African resident has substantial offshore assets, it makes sense to execute separate Wills for each of the jurisdictions where the substance of the assets are. I say this because if one has various sets of assets in for instance the UK and likewise in South Africa and only one Will, the finalization of that Will will be dependent upon factors totally outside the Executor’s control, namely the winding up of the offshore assets. There may be difficulties or problem areas in this regard or just delays with the consequent prejudice to local heirs. A local Executor will of course not have expert knowledge of the legal problems that may relate to offshore assets which an Offshore Executor would be able to deal with. A separate Will would ensure that the administration in respect of the assets for each the jurisdictions in question, could be speedily wound up. That situation does not affect however the liability of the Estate of the South African resident to pay Estate Duty in South Africa wheresoever such assets may be found subject to the crediting as aforesaid.
- In times of yore offshore Estates were secret and not known to the South African Executor. Now all is different, as a result of the Amnesty in 2004 a VDP until October last year and a general easing up on the Exchange Control front. As for Exchange Control, I have wrongly forecast since 2003 that Exchange Control was about to be abolished. The reason being that the purposes behind the Amnesty and VDP were to increase SARS tax receipts based on previously unknown offshore earnings. The deal implicit in the provisions was that, as a South African resident, you can take your money where you want, but you have to pay tax on those earnings if you want to live in South Africa. The failure to abolish Exchange Control breaches this deal. The Treasury is frustrated by this and as a result the Foreign Allowance has been constantly increased to bypass Exchange Control
- However, Exchange Control still remains. The essence being the rule that “thou shalt not take assets offshore in excess of a particular amount without my approval”. The result being that skills emigrate to remove their hard earned millions. There are five categories of Exchange Control residents including South African Residents Temporarily Abroad. These persons probably number up to 2 million souls. They left South Africa as dreamy students seeking a world experience and for one of any number of reasons did not come back. Unless they formally emigrate they cannot inherit from a South African resident because they are still subject to Exchange Control regulations even though they may have left South Africa 40 or 50 years ago. As I understand it, Exchange Control employees spend 90% of their time dealing with emigration applications for persons who departed but did not emigrate up to 50 years ago, because self-evidently many of such persons’ parents have since died.
- As an Executor with offshore assets that have not been regularized, you cannot act, at least as a professional person, save and except by declaring such assets to Exchange Control. A 40% levy will be charged on assets left offshore and if repatriated, 20%. Off course SARS must also take its cut. Under the Tax Administration Act which was passed at the end of last year, there is now a permanent VDP in terms of which where offshore earnings are disclosed, no penalties will be levied subject to payment in full of the taxes that should have been paid together with interest thereon.
6. Estate Planning
There are various techniques to reduce Estate Duty. I will deal with one or two aspects.
- There is no Donations Tax between spouses but if you analyze the 4A deduction it is immaterial whether the substance of assets are found in the Estate of the first or second dying. However there are lots of other advantages. Take the exemption from Donations Tax of R100 000,00 per year per person. Ensure therefore that each spouse has sufficient assets to make that donation to a Trust set up as a vehicle to hold appreciating assets and leaving the debt relating to the sale of those assets in the hands of the Testator being reduced by at least the sum of R100 000-00 per year as aforesaid.
- If you work through the figures of a sale of shares to a Trust even now, with a growth rate of say 8% per year for 15 years, with the loan accounts being credited with dividends received and annual donations of up to R200 000-00, the saving on Estate Duty and CGT is huge.
- The critical component of the creation of a Trust is a sale and not donation of the equity or assets in question. Why pay a tax of what amounts to Estate Duty upfront, when a sale with a loan account being created repayable on demand, interest free, will suffice. SARS cannot attack the interest free element because it is not an abnormal transaction but a family related arrangement. There is no capital element because the loans are repayable on demand. Brummeria is simply not applicable.
- However many are querying whether Estate Duty will not die a sudden death soon! . Next year’s Budget foresees approximately R1.5b are to collected as Estate Duty / Donations Tax which on an overall collection of approximately R80 trillion, equates to not even 2 tenths of one cent ! SARS approach however is to let sleeping dogs lie while enjoying greater and greater returns from CGT. In the result the Budget has taken advantage of this facility and increased the effective CGT rate to up to 13.3% for individuals, 18.6 for Companies and 26.7 for Trusts.
- Remember also that Section 56(1)(g)(i – iii) of the Income Tax Act excludes property acquired offshore for the first time before a person becomes a resident and inheritances/donations from a non-resident. Returning residents temporarily abroad may believe that such property will not be subject to Estate Duty because it was acquired while they were non-resident. Unfortunately because they were born in South Africa, it can never be property acquired before they became residents in South Africa the first time!
- Note also that such assets are not required to be reported to Exchange Control either as from 1 July 1997 or if inherited, 17 March 1998. Allied to this is the fact that Donations Tax only applies to tax residents, so if you are a South African resident temporarily abroad (i.e. a tax non-resident) donate your assets to a Trust before you come home! These exemptions are mirrored in Section 4(l) of the Act.
7. Concluding Remarks
I was going to summarize the critical components of other Estate Duty saving techniques, including massing, options, limited interests, RA’s and Insurance Policies but have been carried away by other aspects already discussed and have therefore left the best to last, namely, who should be appointed an Executor.
My answer to this is very simple, namely a person specializing in administering Estates and preferably in a smallish or medium sized Firm where personalized service and caring comes tops. So often one finds Wills being advertised for free. 80% of the contents relates to the powers of the Executors but is completely silent as to the actual charge rate applicable. The drafter of these types of Wills generally carries on various other businesses, such as banking or similar financial services.
The consequence to the surviving spouse is not difficult to describe consisting of pleading telephone calls to Mumbai call centres, correspondence to Trust Departments in other parts of South Africa and a prompt deduction of an Executor’s fee at the end of the day.
So it may be pulling yourself up by your own boot strings to suggest to Clients that you be appointed his/her Executor but if that is what you or a member of your Firm specialises in, do it and do it now !
Fiscal And Estate Planning Specialist
15 Floor Plein Park Plein Str.
Cape Town 8001 South Africa
PO Box 254 Cape Town 8000 South Africa
Telephone +27 21 464 1410 (dir)
Telefax +27 21 462 2256
Tax Practitioner PR-7F46600