Facing the New UK NDR Rules? Then It Is Time to Formally Exit From South Africa
Hugo van Zyl CA(SA), a South African based tax advisor specialising in cross border wealth planning and administration, which inter alia includes Exchange Control Exits (financial emigration) recently highlighted the fact that the new UK Non-Domiciled tax Resident (NDR tax) rules on deemed changes from tax resident to fully domiciled status has lead to a flood of new expats, being in the UK for 5+ years, wishing to legally extract their SA assets into more stable hard currency jurisdictions, be it to either the UK or even Switzerland.
Reading the UK / RSA treaty on the avoidance of double death duties one should not be surprised about the drastic reduction of 18 out of 20 to 8 out of 10 years as indicative of a change to being UK domiciled.
Removing or extracting SA wealth is indeed possible without giving up your South African passport or right to return to SA. For certain expats it could be the best possible insurance policy against SA death taxes, for their and the next generation and for some others a hedge against another Zimbabwe-like crisis in Africa.
One of the advantages of breaking the NDR status in year 8 of 10, is that the now UK domiciled ex South African will probably not be face SA Estate Duty (on their death) or the dreaded 10% Excon levy on assets inherited from SA resident family, provided his or her asset base in SA is no longer indicative of their centre of vital interest.
One way to tilt the centre out of SA, but not necessarily into the UK, is to legally extract your wealth from ZA Rand into a truly global currency or jurisdiction. Reading the UK / RSA treaty on the avoidance of double death duties one should not be surprised about the drastic reduction in the deemed domicile rule (from18 out of 20) to 8 out of 10 years as this has always been the window period for wealth transfer before facing UK death or capital transfer taxes. The new NDR hype has been around for some time, we just did not to always apply or know of the 1978 estate or death duty treaty which favoured the UK.
UK residents, domiciled or about to be treated as domiciled, may face a +30% combined death and Excon duties on the value of their wealthy SA parents’ estate, for failing to complete their Excon Exit timeously.
During the week 8 to 12 September 2008 Breytenbachs will facilitate clients wishing to meet Hugo van Zyl, during his UK visit. During the rest of September he will be consulting mainly in California and Nevada, USA
The Current Excon Options Available
Current Exchange Control (Excon) allow South African emigrants to formally exit the SA Excon system, taking R4, 5m in cash and some chattels (between R1 to R1.5m per family) free of the Excon Exit Levy (EEL) out of SA.
The “remaining assets” or blocked assets can be left in SA alternatively, subject to a SARS tax clearance and SARB approval, could be cleared for transfer to a foreign currency after a deduction of a the 10% EEL as and when funds leave South Africa, where after there should not further estate duty and only limited CGT exposure in SA.
All subsequent income (pension, annuity, interest and dividends) are, however, freely transmittable (remittable funds) without suffering another Excon Levy. The UK / RSA double tax treaty (DTA) will favour the UK therefore post emigration funds can leave SA without paying any further income or capital taxes or levies to the SA government or SA Revenue Services (SARS).
Several South Africans living in the UK and EU, for various different reasons is now facing world wide taxation of both income and wealth (typically on death or an earlier capital transfer date) in their new home country. Most longer term expats living in the UK are paying UK taxes on their SA assets and income as they have progressed from the NDR remittance basis of taxation to the new arising taxation of global income i.e. their UK tax exposure is no longer ring fenced to UK income and remittances but taxed on a system very similar to SA’s taxation of world wide income accrual and deemed assets transfers (CGT events).
The various DTA’s often provide some tax, CGT and or death duty relief however the current credit crunch has forced SA expats in the UK (Saffas) to look towards their SA rand based wealth to reduce their UK debt. For others it is a case of closing down the big black “financial commitment” hole in SA, for ever diluting their UK pound income. It is surprising how many Saffas has failed to reduce their SA contributions to life policies, retirement annuities and interest instalments on SA assets no longer required. Add to this the number of SA trusts which ahs now become a UL tax albatross as it is indeed an offshore trust and any income arising would could be taxed in the UK and there is nor formal Excon guarantee that the UK taxes may be funded from the SA “trapped” or blacked funds creating the new UK tax charge.
This is however not the most important reason for considering a formal emigration from South Africa. The estate duty benefit and the legal extraction of retirement income to the UK have suddenly dawned upon many Saffas as they in any event, based on the new arising basis of taxation, will have to pay UK taxes on the SA income.
Transferring or distributing SA capital upon death, may result in a +20% SA death duty whereas a legal emigration of funds whilst alive, at a cost as 10%, may safe you substantial future death duties on greatly inflated SA and UK assets. Saffas deciding to formalise their Excon exit, despite leaving most of their assets in SA (i.e. immovable property) has a further advantage in that their future inheritance from their now elderly or terminally parents may leave SA Rand without a 10% EEL charge. Yes, living in the UK with wealthy SA parents can cost you +30% in taxes before you can legally enjoy the now SA owned inheritance in the UK.
All of the above, read together with the new post NDR tax rules, should encourage all Saffas to ask weather or not its high time and indeed extremely beneficial to permanently collapse the SA family trust, kept alive to protect you against ASA death duties no longer applicable.
Van Zyl will be in London for a week from Monday 8th of September, during which period he will be able to provide Breytenbach clients with a detailed analysis of their Excon options, Death Duty position and most importantly, the possible SA and UK tax benefits should they wish to commence or complete their Excon exit from South Africa (or formal emigration as some of us prefers to refer to the process).
Blocked Asset Regime following the formal emigration
Saffas deciding to formally exit SA (that is commencing a financial emigration without giving up your SA passport) will be able to retain their SA passport yet they have to place all their remaining SA assets under control of the SA Reserve Bank (SARB) where after the said SA assets are commonly referred to as blocked assets or blocked Rands. Any transfer of said blocked funds into a foreign currency, will attract an Excon Exit Levy or EEL at 10% of amount transferred i.e. should you wish to land GBP 100 000 in the UK, you need to request a transfer of £ 111 112.
The Advantages of an Excon Exit
· The EEL is payable as and when you transfer capital from ZA Rand to GBP. Subsequent income and Foreign Earned Income (FEI) previously sent to SA to pay SA mortgage bonds and polices prior to the Excon Exit, is not subject to the 10% EEL being freely transmittable as either FEI income or post emigration income, neither of which are subject to “Excon block”;
· Inheritances bequeathed to non-residents are freely transferable. Failing to complete the Excon Exit prior to your wealthy SA parent passing away, your inheritance will suffer a 20% estate duty and a 10% CGT tax charge (prior to being paid to you) where after you will have to pay another 10% EEL to have UK access to these net after SA tax funds i.e. the combined tax charge can be as high as +30% of your share of the estate. Completing and filing the SARB form MP336(b) before your SA parents passing on, will save you any SA CGT on the subsequent grow between ate of death and the date the 10% EEL is payable when you exit your inheritance from SA.
Having completed the formal emigration, despite having left blocked assets in SA you are now non-domiciled and non-resident (in SA) and entitled to have this inheritance freely transferred out of SA without paying a 10% EEL and without paying 10% CGT (the exception being SA land which will be subject to a 5% of proceeds CGT withholding tax). Saffas living in the UK for less than 8 years may need to consider alternative option as they need not transfer the inheritance into the UK thereby saving UK tax on income not transmitted to the UK where as post NDR UK residents (of +8 years) will be able to claim the limited, if any, SA CGT against UK CGT charges raised on capital transfers arising globally.
· Subsequent to the date of the Excon Exit, emigrant shareholders of listed companies may only remit “income” dividends declared normal trading activities to the UK. A dividend declared out of capital gains, or out of income earned from normal trading activities prior to the date of the emigration remains subject to the 10% EEL, should you not wish to add it to your blocked Rand account for administration by your local bankers;
· Emigrant shareholders of non-listed companies are subject to a different set of requirements namely:
the production of an auditors report
a representation letter in the prescribed form, signed by the a director or senior officer; confirming that
no portion of the net income after taxation out of which the dividend distribution has been declared, arises from surpluses as a result of the revaluation of pre-emigration assets or profits accruing from the realisation of any assets;
- The “remaining assets” constitute blocked assets and must be placed under control of an authorised dealer (your commercial banker in SA) effective from the date of departure or deemed exit. Thereafter a Saffas may no longer operate a SA bank account and all credit cards must be cancelled unless specific permission was granted to retain the credit cards on a credit basis;
- Funds retained in a SA trust or held by individuals prior to their formal emigration may not leave the Rand Monetary Area (CMA) however said trust funds may now be invested in a listed foreign currency hedge funds, known international exchange-traded funds (ETF). Interestingly, whereas internationally institutions are the main users of these currency tracker funds, 80% of the SA investments came from individuals, including 16% from family trusts – which weren’t allowed to invest in these instruments before the first quarter 2008 forex relaxations. ETF’s are essentially passive rand futures investments that by definition can’t outperform the indices and although the investment is neither capped nor Excon limited, EFT’s should replace active management of blocked funds. The SA trust income may be taxed as deemed arising income and for this reason all Saffas should reconsider the future of their SA trusts;
- Authorised investment or utilisation of blocked Rands includes SA listed securities, SA interest bearing accounts and unit trusts. Blocked funds may be used to pay premiums on pre-existing life cover policies and retirement annuity funds. New policies are normally not allowed as a post emigration investment. Generally Saffas are advised not to continue investing into local retirement annuities and the July 2008 lax law amendments now allows you to commute your retirement annuities on emigration despite you not having reached the SA retirement age of 55;
- Persons who have emigrated but have not fully utilised the current authorised foreign investment allowance (FIA of R2m per person) may be accorded an additional capital transfers free of the 10% EEL, provided the capital transfer and FIA combined, does not exceed the families then maximum combined FIA limits i.e. should the R2m FIA be increased to say R3m, the family’s foreign capital allowance increases to R6m where after another R2m (assuming a pre-existing R4m FIA) may leave SA Rand without a 10% EEL;
- Annually R100 000 may be released from blocked Rand accounts for the purpose of gifts, donations and maintenance of third parties and SA immovable property (i.e. your holiday home) in the Republic. In addition to this any amount due as rates and taxes on vacant stands (non- income earning) as well as short term insurance on assets which form part of the emigrants’ blocked assets, against submission of the relative assessment, insurance or local authority bill, may be settled from said blocked cash balances without creating any over draft or local borrowing;
- Excon emigrants visiting the Republic are entitled to have funds released from their blocked Rand accounts of R3 000 per day per adult and R1 500 per child under 12. This is subject to a maximum amount of R75 000 per family unit per year and in addition to this, return airfares to and from the Republic may be paid from blocked Rand account as the emigrated Saffas is no longer able to claim the R500 000 annual discretionary (travel) allowance. The annual allowance of R75 000 can be paid into a Visa or Master Debit Card which can now be used at several fuel stations to purchase fuel and oil, which was previously only chargeable to the uniquely South African Garage, Fuel or Motor Card;
- Blocked funds may be utilised to pay for medical and dental services whilst in South Africa, without accordingly reducing the R75 000 annual allowance;
- Blocked funds may be released, on application, to fund local taxes incurred on the blocked assets. Although SARB has approved specific applications, there is no formal guidance to allow banks to settle UK taxes on the blocked assets. Income is freely remittable and UK taxes on income not remitted may not be taken from the blocked fund i.e. remittable funds must fund taxes on remittable funds where as blocked assets (i.e. property or shares sold) may fund UK CGT charges or the 8% difference between SA CGT (say 10% maximum) and UK CGT rate at 18%. Failing to have funds blocked, income is not freely remittable yet fully taxable in the UK unless a specific roll over is applicable. Your UK tax advisors will be able to advise you on the UK tax relief in Excon “trapped” income;
The Excon Exit Process – filed by your authorised dealer.
The application process, which includes filing forms MP336(b) with SARB and SARS form IT21(a) may appear daunting however with the assistance of emigration advisors, such as Breytenbachs in association with Hugo van Zyl the South African process may be completed from the UK without the applicant being present in South Africa. Saffas without local bank accounts should in fact ensure they have fully operational SA bank accounts (FIC Act compliant) alternatively we need to involve you UK bankers which complicates the process even more.
Van Zyl’s personal webpage www.hugovanzyl.com clearly explains the Excon Exit process and readers are reminded of the following minimum and or advised requirements:
· The Excon exit is a family process to be followed jointly and simultaneously by both spouses and all their children below the age of 18;
· Excon exit is subject a tax clearance which entails registering Saffas having deregistered from the SA tax system;
· An undertaking not to return permanently to South Africa within the next five years or the reverse statement is that you can not complete your Excon Emigration without being able to prove you can remain indefinitely in another country is have a second passport or a UK ILR (such as the ancestral visa but not the HSMP);
· Annual SA visits, be it on vacation or for medical reasons, are allowed and can be funded from blocked funds as stated earlier;
· Retaining existing directorships will be allowed whilst seeking re-employment or new employment within the CMA, or returning to SA permanently for any reason, may result in all “unblocked” funds to be repatriated back to ZA Rand without the benefit of a 10% EEL refund;
· Separate wills in respect of assets held within and outside SA. In fact, all South Africans, whilst holding UK in situ immovable property or assets, are advised to ensure they have a valid English will to be lodged in the UK. Joint accounts held outside the UK may solve some of the challenges faced during the administration of a deceased estate yet it is not the be all and end all answer to estate duty and probate rules and it often leads to disputes between siblings having or not having access to “inherited” bank accounts.
Consultation Available In the UK
During the week 8 to 12 September 2008 Breytenbachs will facilitate clients wishing to meet Hugo van Zyl, during his UK visit. Interested parties can contact writer
11 August 2008