Top ten SARS trends

Article published on news 24 at

Tax season 2019 officially opened on Monday July 1 for taxpayers who use the updated digital channels, namely eFiling and the SA Revenue Service MobiApp. This year, SARS is clamping down on non-compliant taxpayers – with the following 10 trends in the spotlight.

Outstanding or late returns

Outstanding returns and late returns remain a concern and SARS says it will step up its enforcement of penalties in this regard.

Rental and Capital Gains Tax

“Many taxpayers still do not declare rental income from properties and we will improve our data matching in this regard by collaborating with the Deeds Office.

“This matching will also allow us to better enforce non-compliance in the declaration of Capital Gains Tax,” says SARS.


SARS will renew its focus on monitoring income and expenses from commission earners.


SARS is concerned about the accuracy of declarations of distributions to and from trusts to the beneficial recipients.


“We have also noticed tax preparers unethically promising taxpayers that they will secure a refund. They then look for opportunities to understate income or overstate expenses,” says SARS.

“This is a serious offence and could result in criminal charges as well as financial consequences for the taxpayer who remains accountable to SARS for their submissions.”

Fabricated expenses, IRP5s

SARS has noticed a trend of fictitious refunds being claimed for fabricated expenses and losses, as well as fictitious employers generating IRP5s for the sole purpose of claiming refunds.

Multiple returns

Fraudsters file multiple returns to create refund opportunities and syndicates re-use IRP5s across multiple individuals.

Risk modelling

SARS is working hard to improve the integrity of its profiling capability by using sophisticated risk modelling and expanding our data set.

Last year SARS prevented over R8.2bn fraudulent returns from being paid.


SARS is currently working with both the SA Police Service (SAPS) as well as the National Prosecuting Authority (NPA) to criminally prosecute fraudsters.

SARS has already successfully convicted a number of taxpayers for non-compliance. It has even successfully convicted some of its own staff for colluding with taxpayers.

The super-rich

“We are instituting a renewed focus on high net worth (HNW) Individuals who often arrange their affairs in complex ways, often presenting higher compliance risks to SARS,” the revenue agency said.

South African Expat Tax Guide

South African SARS Expat Tax
Lisa Smith –
April 18, 2019
South Africa SARS Expat Tax

South African Expat Tax is the new rule by South Africa’s South African Revenue Service. Find out below what it means to you and ways to plan finances for maximum efficiency.

South Africa is switching to a new way of working out income tax for expats which means they could pay tax on money that they earn abroad and never send home.

The impending tax is due to start from March 2020 and is already causing consternation for thousands of South Africans living and working overseas. Expats in zero-tax economies, such as Dubai or Abu Dhabi, will feel the brunt of the law change as they will pay tax in South Africa on income earned, spent, invested or saved even if they or their money never set foot in their homeland but they are judged ordinarily resident.

Table of Contents

South Africa’s Expat Tax Explained
Interaction with the Common Reporting Standard
What is a ‘physical presence’?
What does ‘ordinarily resident’ mean?
Are you really an expat?
Who is impacted by the new tax?
What options do expats have?
Other taxes expats must pay
Download the Free South African Expat Tax Guide

South Africa’s Expat Tax Explained

South Africa’s SARS, South African Revenue Service, has new rules about the reform of the foreign employment income tax exemption for South African residents overseas, which is often called ‘expat tax’ for short.

This guide takes an in-depth look at the timeline of the new tax rules and how they are designed to work.

The change is all part of the shift in South African from taxing income sourced in the country to taxing income earned worldwide by residents.

Those paying the tax must are tested as ‘physically present’ or ‘ordinarily resident’ in the country.

The new rules drop the traditional expat tax exemption that was designed to stop South Africans paying income tax on their earnings at home if they were abroad for 183 days in any 12-month period, which must include a continuous absence of 60 days or more.

In Budget 2017, then finance minister Pravin Gordhan announced the abolition of the expat exemption from March 2019.

In Budget 2018, finance minister Malusi Gigaba confirmed the start date again, but public protest made him only make the new rules subject to expats earning ZAR1 million or more – equivalent to US$69,400/GB£52,450 or AED255,000.

Income tax is payable on earnings of over ZAR1 million at rates of up to 45%.

In March 2019, another new finance minister at the Treasury, Tito Mboweni, again confirmed the new expat tax rules will start from March 2020 and that the government has no intention of ditching the legislation.

He did announce a public workshop to discuss some of the issues, but no rule changes have arisen from the consultation.
Interaction with the Common Reporting Standard

At the same time as announcing the new tax on expats, like many other nations, South Africa launched a chance for taxpayers to come clean over undisclosed wealth while waiting for the Common Reporting Standard (CRS) to kick in with an amnesty.

CRS is a data-swapping network of the tax authorities of more than 100 countries. Each authority compiles a list of accounts and investments controlled by foreign nationals and sends the details to the expat’s home nation tax authority for comparison with their tax filings.

In return, other authorities in the network send financial data on expats back.

The CRS network is now up and running, so the South African Revenue Service (SARS) is already collecting information about the financial affairs of expats to cross-check against their tax returns.

The result is if the expat fails to disclose income, SARS will have data from elsewhere indicating possible tax avoidance.
What is a ‘physical presence’?

The ‘physical presence’ test determines if someone is tax resident in South Africa by checking the number of days they spend in the country.

The test is in three parts. Someone must fail to meet the date limits in each part to prove non-residency for tax – the tests are:

Did someone spend 91 days or more in South Africa during the tax year in question?
Did someone spend 91 days or more in South Africa in each of the five tax years prior to the tax year in question?
Did someone spend 915 days or more in South Africa during the five tax years before the tax year in question?

Anyone who meets one or more of the tests but who stays out of South Africa for 330 days or more is a non-resident from the last day they qualified as physically present.

Everyone else is taxed on their worldwide income and gains in South Africa.

To beat the physical presence test, expats should log the times and dates when they enter and leave South Africa to accurately record if they were physically present in the country – noting the time limits apply to full days, not part days.
What does ‘ordinarily resident’ mean?

South African tax law determines non-residents are only taxed on their income from a source within the country.

The legal term ‘ordinarily resident’ is not defined in law, but a string of court cases over the years have shaped the legal meaning.

The lead case is Cohen v the Commissioner for Inland Revenue, dating back to 1946.

The case established that a person was ordinarily resident regardless of the time they spent away from South Africa if they still regarded the country as home and the place to where they would eventually return.

A briefing note issued by the government lays out the Cohen case and other important residence cases decided in the courts.

Issues that affect residence can include if someone owns a home in South Africa, has family and social ties to the country, repeatedly visits the country, holds a South African passport or owns a bank account.

Read more about court cases determining ordinarily residence
Are you really an expat?

Like expats from other countries, South Africans abroad cannot decide they are non-resident at home and now resident in another country.

Non-residence is a matter of fact and law and the physical presence and ordinarily resident tests decide the issue for them.

That means expats can live in another country but still be ordinarily resident in South Africa if they have not taken care to break all ties with their homeland, leaving the expat open to receiving an unexpected tax bill.

The government reckons just over 900,000 South Africans live abroad, but only 103,000 can show they are non-resident in South Africa. That leaves nearly 800,000 expats facing tax bills when the new laws take effect in March 2020.

And if they are non-resident, any return to South Africa within five years of leaving can class them as failed emigrants and leave them open to financial penalties.

“An individual will be considered to be ordinarily resident in South Africa, if South Africa is the country to which that individual will naturally and as a matter of course return after his or her wanderings,” says guidance from SARS.

“It could be described as that individual’s usual or principal residence, or his or her real home. If an individual is not ordinarily resident in South Africa, he or she may still meet the requirements of the physical presence test and will be deemed to be a resident for tax purposes.”

SARS tax guidance for non-residents with income or investments in South Africa
Who is impacted by the new tax?

Any South African abroad earning ZAR1 million or more from any source will fall into the SARS tax net.

Double taxation treaties may protect expats paying tax at an equal or higher rate than in South Africa, but anyone else should expect a bill from SARS.

Companies sending workers abroad on assignment will have to consider how the tax will affect them.

Gross earnings will not only cover salaries, but benefits like accommodation, cars, school fees and trips home as well.

Those in the Gulf States who pick up a tax-free gratuity at the end of their contracts will find they have tax to pay on these lump-sums as well.

The concern is employers at home and abroad will pick up the tab for expat workers by increasing salaries and benefit packages to cover the new tax, pricing South African workers out of overseas assignments.
What options do expats have?

The CRS is a major problem for expats as they have no choice other than to honestly file tax returns knowing that their affairs are open to scrutiny as banks and financial services organisations will disclose the details to the tax authorities.

Many will have limited options:

Accept the tax reducing their net incomes
Return to South Africa
Become a financial migrant
Looking for tax planning opportunities to reduce liabilities

Financial solutions, such as pensions and bonds may defer paying tax for a significant time, but as will all tax planning, the government close the opportunity by changing the law at any time.

Leaving South Africa to become resident elsewhere can lead to other tax implications on assets such as property or investments still in the country.

Another worry for expats is most assignments abroad are paid in US Dollars, a strong currency that has driven down the exchange value of the Rand.
Other taxes expats must pay

Besides the new income tax on earnings, expats also face capital gains tax and estate duties.

Capital gains are complicated to work out because they include an element of currency gain or loss and if several exemptions, allowances or losses are available to offset against any profits.

Taxpayers also have an annual allowance of ZAR40,000.

The tax is charged at rates of from 18% to 40%.

Donations and estate duty are imposed at 20% on the worldwide assets of residents and on South African assets of non-residents.
Download the Free South African Expat Tax Guide

South African Expat Tax Guide expert writers have created a simple guide to the South African Expat Tax just for our readers.

This guide will explain the South African Expat Tax and talk through the issues and steps you can take to be in a better financial position. Download the free guide by following the link –

South African expats foreign employment income tax

Hugo van Zyl’s article –

How foreign employment income tax will impact South African expats
Do not believe the fear mongers suggesting you must emigrate formally to correct non-compliance.
Hugo van Zyl by Hugo van Zyl – 2019-01-29 11:01 – in South Africans Abroad

The current hype into formal emigration being the absolute and final solution to escape the tax consequences of the new #Tax2020 rule has resulted in too many expats South Africans incorrectly opting for formal emigration.

Any expat that is concerned about the pending changes should immediately ask the following question: Did I file all my tax returns up to February 2018 and am I correctly registered as a provisional taxpayer? Being tax exempt does not exempt you from tax filing obligations.

Before one gets overly concerned about the March 2020 [#Tax2020] liability, you need to address the issue of outstanding and overdue tax returns. Anyone impacted by the new rules should have been tax filing with SARS.

If not tax filing for some years, one must ensure you have correctly tax emigrated and paid your exit levy on time. Doing a financial emigration in the current tax year, will not shield you against tax penalties and interest on the unpaid taxes.

Do not believe the fear mongers suggesting you MUST emigrate formally (Financially Emigrate [FE]) to correct non-compliance and to protect you against the new rules. Tax emigration and not financial or formal emigration dictates your SARS exposure

Before we consider all the incorrect and half-truths out there, one should first determine the exact rules, consider the legislature’s intention behind the changes and then only apply it to one or more specific cases. This handrail is not able to address all the typical scenarios. We will, however, attempt to identify three or four typical examples we have seen in recent times.
The new rules affect 1 March 2020

The rules only apply to tax residents, albeit that they reside outside SA.
It follows that once you tax emigrated, having told SARS of the exit and paid your exit tax on worldwide assets, you are no longer required to report foreign income (be it remuneration of passive investment income) to SARS.
For this reason, many expats are keen to tax emigrate, yet sadly they are unwillingly and unnecessarily coerced into financial emigration also known as formal emigration.
No longer will the full extent of foreign employment income earned be fully tax exempt.
SA tax residents and only tax residents will, as has been the case in the past, must report the full extent of foreign income to SARS.
Currently, on assessment SARS will unilaterally tax exempt the total income from tax
Tax residents spending +183 days outside of South Africa, rendering
employment services will only be exempted up to the first R1million of their employment income (referred to in the act as remuneration) earned abroad;
tax residents will still be required to have spent a continuous period of at least 60 full days, rendering employment services outside South Africa, during any 12 months to qualify for the exemption
Any foreign employment income more than R1 Million will, as of the 2021 tax year, commencing on 1 March 2020, taxed in South Africa, applying the normal individual tax tables.
The effective tax rate will be determined with reference to the aggregate worldwide income and deemed income, reduced by the first R1 million in respect of foreign income from employment.
If so taxed on remuneration exceed R1 million, the tax resident will be able to claim a foreign tax rebate with SARS, alternately, the taxpayer can rely on the various tax treaty benefits.

The Treasure Explanatory Memorandum [EM], issued in 2017, justifies and explains the changes as follow:

“Tax residents who spend more than 183 days outside of South Africa rendering employment services will now only be exempted up to the first R1 million of their employment income earned abroad. The R1 million exemption will provide relief for lower to middle-income South Africans working abroad.

“Any foreign employment income earned over and above this amount will be taxed in South Africa, applying the normal tax tables for that particular year of assessment. Residents will still be required to have spent a continuous period of at least 60 full days, rendering employment services outside South Africa, during any 12 months to qualify for the exemption.”

Keywords and tax phrases to be understood

Remuneration from employment – the word remuneration as used in the SA Income Tax Act, 1961 as amended [ITA], does not define remuneration. SARS Interpretation Note is quick to remind the taxpayers that the 4th Schedule or PAYE rules’ definition is not relevant in the main body of the
Resident – resident, has been defined for tax and Exchange Control [Excon] purposes, yet either of the two set of rules deals with or refers to the other
The Excon rules does however deems a non-citizen in possession of a green bar-coded ID or Smart Card ID, to be an Excon Resident
See the Excon Guide extract below that refers to a permanent resident. Therefore the Home Affairs decision to grant indefinite residential stay and employment rights has a direct impact on the Excon Resident rules
There is no reference in the Excon Resident definitions speaking to tax residency, and vice versa.
Tax resident – Although the actual law changes do not refer to residents, it is trite law that only tax residents can and need to claim the foreign income exemption, as foreign income of a tax non-resident is not subject to our ITA; yet
tax resident does not include any person who is deemed to be exclusively a resident of another treaty country; provided
that where any person that is a resident ceases to be a resident during a year of assessment, that person must be regarded as not being a resident from the day on which that person ceases to be a resident
Emigrant, nor non-resident is defined in the ITA, yet
For purposes of Excon is defined as South African resident who is leaving or has left South Africa to take up permanent residence or has been granted permanent residence in any country outside the CMA
Excon Resident – as defined and deemed in terms of Excon manuals
Resident, for formal emigration [FE} purposes means any natural person who has taken up permanent residence.
For the purpose of the Authorised Dealer Manual, any approved offshore investments held by South African residents outside the CMA, will not be Excon resident
However, such entities owned by Excon Residents (albeit a company in SA) remains subject to Excon rules and regulations
Excon non-resident – as defined in the Excon manuals issued by SA Reserve Bank [SARB]
Non-resident means a person (i.e. a natural person or legal entity) whose normal place of residence, domicile or registration is outside the CMA
Emigrants mean a South African resident who is leaving or has left South Africa to take up permanent residence or has been granted permanent residence in any country outside the CMA.
From practical experience, we know SARB may allow, say UAE based expats to formally emigrate, despite them not being able to register as a permanent resident of UAE or say Dubai.
Non-residents for Excon purposes include:
Any natural persons from countries outside the CMA who are temporarily resident in South Africa, excluding those on holiday or business visits, i.e. a person on work visas or retiree visa and in most cases persons on a spousal visa without the right to seek local employment.

Financial Emigration (FE) is exactly what it says, it is a financial status change that one can elect to undergo, provided you have left SA to take up or have been granted a permanent residence permit, outside the CMA [Common Monetary Area, being SA, Namibia, Lesotho and Swaziland).

It is correct that the SARB financial process is subject to filing a tax emigration clearance to confirm a good tax standing, that all returns were filed, and all taxes are paid or provided for on departure.

Recently a Fin24 article quoted Claudia Aires Apicella, head of financial emigration at Tax Consulting SA, suggesting that Apicella and Tax Consulting SA is of the opinion that:

“When one “emigrates financially”, however, they cease to be a South African tax resident and will not be liable to pay any South African tax on their worldwide income. They will, however, be required to declare any South African sourced income which may be taxable, such as rental income.”

FE is not a tax emigration requirement, nor does it trigger or guarantee tax emigration or non-resident tax status. Product providers or FE specialist, now promoting FE at all cost or as the ultimate solution to escape the new #Tax2020 rules, are misleading taxpayers.

Yes, the minute your chosen adviser suggests FE is NOT an option, it is a pre-requisite or a way to tax emigrate, be scared, be very scared and obtain a second opinion from a tax specialist not earning his fees from the FE process.
What then is the best solution or option available to taxpayers?

There is no one single solution for all. The answer is in client-specific tax profiling and the following tax issues and profiles, were identified during the past years:
Expats with no tax-exempt amounts

It is of great concern, having seen how many expats South Africans, not having tax emigrated (i.e. they are tax resident or deemed to be tax resident) incorrectly believe they have been and will continue to enjoy a tax exemption on their foreign income.

The act is rather clear, and Interpretation Note 16 (Issue 2) [IN16] stipulates that the exemption is limited to remuneration from foreign employment, while passive and business income remains fully taxable for as long as one is tax resident in SA.

Passive income and independent contract income, does not qualify for to the 183/+60-day exemption; whereas
Leave days, albeit spent in SA, may qualify for exempt days to determine the proportional exemption, provided the more than 183 days were achieved.

Tax treaty protection

Most expats live and work within a country where a tax treaty may indeed protect them, provided they have tax emigrated from South Africa.
Tax emigrated expats

Many expats tax emigrated some years back, yet they have failed to notify SARS and more importantly, failed to pay the exit tax. Their tax exposure, penalty and interest liability now faced may indeed have a bigger cashflow impact than the new #Tax2020 rules.
Payroll tax at source

Working in a country that does not tax you on worldwide income, yet they tax you on the local income from employment. These tax systems rely on the source-based tax rules to collect tax against immigrant or guest employee, yet most taxpayers did not even know their employers paid the source tax on their behalf. Taxpayers are advised to ask their employers about the taxes they paid on their behalf, as SARS will allow a tax credit for said local taxes. This rule applies to both treaty and non-treaty countries.
Pay up

There are indeed a small number of expats that do not have any option but to adjust their lifestyle as they will need to adjust their new after-tax net income, as of 1 March 2020. For them #Tax2020 is painful. One such a class of taxpayers are so-called independent contractors.

Independent contractors do not earn “remuneration” and as a rule, do not qualify for the exemption. A person must, therefore, be an employee earning remuneration to qualify for the exemption.
Contract workers must be under contract and outside SA for more than 183 days while under contract. Unemployed periods spent outside SA does not count, whereas rest periods between rotational shifts (oil rig workers) do qualify as its leave periods. Contract workers are not providing a service during the period between contracts, normally fails the days’ test, because both the service as an employee and the physical presence test must be complied with to ensure the relevant tax exemption.

Officers and crew on a ship

There is a separate set of rules addressing the tax exemption of natural persons employed on a ship. There is indeed a separate Interpretation Note 34, dealing with employees on the water. Employees on the ship, not involved in the passage or navigation of the shop (mining and exploration staff, as well as operators of the onboard shops) will have to apply the rules as set out in Interpretation Note 16 (Issue 2). The main differences between Interpretation Note 16 and 34 are:

The 183 days for crew and officers are determined with reference to a tax year, whereas the other foreign workers test their days outside in any twelve months; and
The 60-days continuous and uninterrupted day rule to qualify which does not apply to crew and officers on a ship transporting persons for reward, and
Ship crew and officers will not be subject to proportional tax on the days spent within SA, whereas an employee qualifying under the 183/+60 day rule (Interpretation Note 16 (issue 2)) will have to pay SA tax on the days employed in SA, i.e. they only enjoy a proportional exemption; and most importantly
The crew and officers are qualifying for the exemption as explained in Interpretation Note 34, will not be subject to the R1m exemption cap.

SARS guidelines issued to date

Sadly, one year after the promulgation of the new act, and just one year away from implementation and SARS has issued no new or revised guidelines. Interpretation Note 16 (issue 2) was in the making for near 18 months, and the general 2018 tax guide was only issued 11 days before the 2018 tax filing deadline. SARS is notoriously slow in updating their guides and interpretation notes. It is also of great concern that they have not even issued Interpretation Note 16, draft issue 3 for comment by taxpayers and the industry.

Hopefully, SARS will soon issue Interpretation Note 16’s 3 version and even consider updating Interpretation Note 34.

Financial Emigration (FE) is indeed advisable for true emigrants, not intending to return to SA. Persons forced to return to SA or persons most likely to return to SA at the end of their work permit stay, should think twice before they allow a service provider to convince SARB they qualify as Excon emigrant.

Using FE application date to trigger tax emigration, is indeed extremely risky. An expat living in Dubai, claiming tax emigration in 2019 calendar year (the tax year 2020 or 2019) confirms they are tax non-resident because of the UAE tax treaty rules. Nothing wrong with that, yet the treaty has been in place and effective since 23 November 2016.

Should the FE applicant have been in the UAE on 23 November 2016, and now avail to the USA tax residency certificate, they are indeed admitting they may have tax emigrated on 22 November 2016. The section 9H (in its current format) exit tax charge, dates to 15 June 2015.

On 23 November 2016, as the UAE treaty became effective, many SA expats technically tax emigrated on the day before them becoming exclusive tax resident in the USA (because of the treaty). Filing tax emigration to align with the FE exit day, is most probably an incorrect and fraudulent tax position to take.

Having failed to inform SARS of the correct tax exit date, based on the physical exit date applied to the treaty tie-breaker rules, may result in an understatement tax penalty.

The physical exit date is normally disclosed on the FE application form (MP 336(b) and a copy are filed with SARS). Should SARS later decide to audit or verify the tax exit date or final tax return filed following the approval of the tax emigration clearance certificate [TEC], one may not claim the benefit of tax prescription (reading tax certainty).

It follows that, because of the incorrect and incomplete tax disclosure, SARS is not bound by the three-year prescription rule, i.e. they can issue new assessments after say five years.
The SARB FinSurv [Excon] approved FE, does not change your tax status.

Only the SA Income Tax Act (ITA) may be used to determine tax emigration status, yet in certain instances, the resident definition in ITA section 1, allows treaty country residents, to be tax non-resident.

Reading the tie-breaker rules or applying said rules may not be adequate. The definition of a resident in the treaty overrides the ITA definition with the result that expat in Dubai may be tax non-resident while on a work permit only, whereas an Australian expat on a work permit will remain SA tax resident.

The Australian treaty [DTA] excludes from the word resident, any person paying tax in Australia, on Australian sourced income only. The UAE DTA does not contain this similar restriction, most probably because the UAE does not levy any income tax on natural persons.

In Australia, a resident pay tax on worldwide income as of the date they qualify or is granted permanent residence status. Expats in Australia, availing to a work permit only, does not pay ATO taxes on worldwide income. The SA/ Australian DTA excludes from the term resident, an expat on a work permit only (because the ATO only tax work permit residents on source income only). Therefore SA expat can’t claim tax emigration status.
In Conclusion

Expats living outside SA must first ask the following questions before they agree to financially emigrate:

Can I avail to tax treaties and tax emigrate, as this is not subject to financial emigration? If yes, on what date was the tax exit? If it was in the past (for UAE could have been 22 November 2016), should I file for SARS availing to the Voluntary Disclosure Options to back date the process?
Can I claim tax credits in SA, as I have paid the necessary tax in the country of employment? It could be that your employer is paying on your behalf, do ask the HR department.
If you are not in a treaty country, can I tax emigrate based on facts and intention?
Could the FE option be part of the building blocks to show intention to exit? If so, was the tax exit date this year or sometime in the future?

Why should I complete the Financial Emigration process? Here is some reasons:

To cash out a retirement annuity
To be able to re-invest into SA via my for offshore trust or non-SA company to ensure I am not exposed to SA estate duty
To exit large funds (more than R20m per family) sourced from past savings or huge inheritance?
Why is the service providers placing so much emphasis on FE, insisting I incur the huge costs?
Should I not obtain a formal tax opinion from a person not selling FE to one and all, but only to persons that could show a clear benefit? – Written by Hugo van Zyl

When tax becomes a turning point for people to stay or leave

Written by Amanda Visser / 16 April 2019 –

A recent change to the taxation of foreign trusts will have far-reaching effects on the distribution of income and capital gains to South Africans.

According to tax executives, it may just be the final push for South Africans with a large asset base offshore to join their assets rather than repatriating them and paying a maximum of 20% tax.

In terms of the Taxation Laws Amendment Act, any income or capital gains that would previously have been exempt from tax will now be taxed from March 1 this year.

Baker McKenzie’s legal and tax experts Matthew Tout and Arnaaz Camay say these changes came as a result of a push by the legislature to close identified loopholes associated with foreign trusts and seek to regulate SA resident individuals who have an indirect interest in a foreign company through foreign trusts.

Participation exemption removed

Keith Engel, CEO of the South African Institute of Tax Professionals, says SA allowed for a “participation exemption” in 2002 in order to be internationally tax-competitive.

This exemption meant that if a South African tax resident owned shares in a foreign company, they were exempt from tax on dividend and capital distributions.

The European and British legislature allowed for a participation exemption so as not to discourage their tax residents from repatriating money from a foreign source.

“In the US they are taxing the money that is coming home, so people tend to keep it offshore longer,” says Engel, who was at National Treasury in 2002 when the participation exemption was introduced.

SA basically followed the European and British models, but this has now changed. All distributions from a foreign trust to a South African tax resident made after March 1 2019 will be taxed.

Johan Troskie, an international tax and commercial lawyer, says the amendment had been hinted at earlier – effectively to tax foreign companies held by interposed offshore trusts, the so-called look-through principle.

Tax avoidance concerns

Offshore trusts have long been seen by the South African Revenue Service as part of various measures to avoid tax in SA.

“My difficulty is that tax legislation in SA is often so blindly aimed at tax avoidance that we miss the opportunity of good tax law,” says Troskie. “Why would SA beneficiaries not enjoy the participation exemption of a foreign trust in a foreign company?”

This look-through principle may further contribute to driving much-needed investment capital from SA at a time when we definitely cannot afford it.

“The people and families who this measure is aimed at are the very people who start new ventures and employ people in SA – we should welcome them, not drive them away.”

Engel says in most instances distributions are only made when the South African tax resident wants to bring the money back to SA. But with a maximum tax rate of 20% for individuals, it becomes expensive.

The people who are affected are those who set up offshore trusts but did not want to keep the money offshore indefinitely.

“It will not hit the super-rich because they never intended to bring the money back,” says Engel. “People who set up offshore trusts as part of their expatriate planning will also not be too bothered.”

The people who do care are those with lower levels of wealth, or who have greater income needs in SA than they anticipated.

It is these people who may want to repatriate the money. It is also people who wanted to build up some offshore reserves but had no intention of leaving SA.

“Although it [the amendments] want to devalue offshore trusts as a whole, it really only devalues the repatriation. It will hit people who have assets of around R20 million to R40 million.”

Wealthier people are increasingly making the decision to leave the country, and sometimes tax becomes a make-or-break point.

“People say tax became the turning point for them,” says Engel, “if they are already half in and half out, the tax aspect pushes them to leave.”

It is similar to the limitation on foreign income tax exemption, where only R1 million of the foreign income will be exempt from South African tax.

Theoretically, the foreign trust charge does have merit. However, whatever gain SA gets in taxing the repatriated income or capital gains in the short run, it will lose from the tax base in the long term, adds Engel.

Published by:

Income outside of South Africa from 1 March 2020

First published by

Final Version:- On 6 March 2019, National Treasury confirmed that the repeal on Section 10 (i)o(ii) will go ahead and amended section as tabled out in December 2017 will be implemented from the 1st March 2020 which affects your 2021 tax return submission from July 2021. This means that you will still need to complete the 183 days out the country and in the 183 days 61 days must be consecutive. This exemption period will exclude any travel days you have done into and out South Africa. Your exemption period can be done in any 12 months of the year and does not have to be in the tax year from March to February. Once this requirement is completed, your first million rand will be exempt from South African income tax. However any income over and above the million rand may be subject to income tax in South Africa
Your remuneration will include your basic salary, allowances and fringe benefits accrued to you during that exemption period. You will prove your salary in the form of payslips, employment contracts and bank statements. Due to foreign exchange that will need to be considered, we recommend that you utilize the WWTS Offshore Tracker Report to detail your foreign income, foreign taxes and date of payments.

SARS will set up a dedicated head office function that will deal with matters pertaining to the amendment, this will still need to be confirmed.

The above amendment only applies to Section 10 (i)o(ii), therefore Section 10(i)o(i) and Section 10 (i)o(iA) remain the same.

Options to consider:
The South African tax system is based on your residency status. Therefore you need to apply the following tests to determine if you are a tax resident or not. This will determine if you are required to submit your foreign income on your South African income tax return
Please note citizenship and residency are two different tests, and your residency tests are based on the number of days you are present in a country
When assessing whether a natural person is ordinarily resident in the Republic, the following factors will be taken into consideration:
• An intention to be ordinarily resident in the Republic
• The natural person’s most fixed and settled place of residence
• The natural person’s habitual abode, that is, the place where that person stays most often, and his or her present habits and mode of life
• The place of business and personal interests of the natural person and his or her family
• Employment and economic factors
• The status of the individual in the Republic and in other countries, for example, whether he or she is an immigrant and what the work permit periods and conditions are
• The location of the natural person’s personal belongings
• The natural person’s nationality
• Family and social relations (for example, schools, places of worship and sports or social clubs)
• Political, cultural or other activities
• That natural person’s application for permanent residence or citizenship
• Periods abroad, purpose and nature of visits
• Frequency of and reasons for visits

The above list is not intended to be exhaustive and is merely a guideline.
The circumstances of the natural person must be examined as a whole, taking into account the year of assessment concerned and that person’s mode of life before and after the period in question. It is not possible to specify over what period the circumstances must be examined. The examination must cover a sufficient period in the context of the specific case for it to be possible to determine whether the natural person is ordinarily resident in the Republic. The conduct of that person over the entire period of examination must receive special attention.

Briefly, ordinary residence is the place where a natural person has his or her usual or principal residence, what may be described as his or her real home. Whether a natural person is ordinarily resident in the Republic is determined based on that person’s particular facts. A natural person who was previously not resident and who becomes ordinarily resident in the Republic, will be liable to tax on worldwide income as from the date that he or she became ordinarily resident.

resident” means any—
(a) natural person who is—
(i) ordinarily resident in the Republic; or
(ii) not at any time during the relevant year of assessment ordinarily resident in the Republic, if that person was physically present in the Republic—
(aa) for a period or periods exceeding 91 days in aggregate during the relevant year of assessment, as well as for a period or periods exceeding 91 days in aggregate during each of the five years of assessment preceding such year of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those five preceding years of assessment,

Based on the above tests, if you are considered a SA resident you will be subject to taxes in SA on your worldwide income and assets

Cease to be a SA Tax Resident
Where a person who is a resident in terms of the above paragraph is physically outside the Republic for a continuous period of at least 330 full days immediately after the day on which such person ceases to be physically present in the Republic, such person shall be deemed not to have been a resident from the day on which such person so ceased to be physically present in the Republic

Financial Emigration
If you want to formalize your emigration status and you have officially relocated out of South Africa, you can apply for financial emigration. This application is done through SARS and the South African Reserve Bank.
Upon emigration, your worldwide assets (excluding South African property), will be subject to capital gains tax known as the Exit Charge. You are not required to sell your assets however you will need to disclose your assets. Should you relocate back to South Africa within 5 years after you have emigrated, this may be regarded as an unsuccessful emigration and SARS can go back and assess your worldwide income for income tax. Once you have emigrated, you can only return to South Africa for less than 91 days in each of the first 5 years so that you meet the non-residency requirements. You bank account will be disclosed as a capital account known by the banks as a blocked account, which means that any transactions through your South African bank account can only be done manually by your bank. You will not have access to internet banking and all your credit cards will need to be paid and closed. Note, you will still be allowed to maintain your South African Home Bond even after emigration.
Your properties in SA are not included in the exit charge capital gains tax calculation, however once you relocate and your residency status has changed to non-resident, then you are subject to withholding tax when you do sell your SA property at the following rates:
Where a non-resident disposes of immovable property in South Africa in excess of R2 million, the purchaser is obliged to withhold the following taxes from the proceeds (unless a directive to the contrary has been issued) at 7.5% on the selling price for an individual
Your intention to relocate must be long term in order for your financial emigration to be successful. Should you have a short-term/limited or contractual work commitment outside SA, you need to apply the Dual Treaty Agreement between South Africa and the country you are working in. You will need to apply for a residency certificate. Each country has their own individual treaty agreements with South Africa.

Worldwide Tax Solutions are able to complete your Financial Emigration Application for you with SARS. Please contact us for a free quotation

Dual Treaty Agreements
DTAs or tax treaties, as they may be referred to, are international agreements between the governments of two jurisdictions aimed at eliminating double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Most tax treaties typically include the following broadly defined sections:
• A preliminary part on the scope of the tax treaty, for example, setting out the taxes on income and capital covered in the tax treaty and defining terms used.
• The main part of the tax treaty that settles the extent to which each of the contracting jurisdictions may tax income, that is determined based on the different types of income and whether the jurisdiction is a source jurisdiction or resident jurisdiction. It further determines how double taxation are to be eliminated.

The DTA permits a mutual agreement procedure (MAP) for resolving difficulties arising from the application of a particular Article in DTAs in the broadest sense of the term.

It basically authorizes the Competent Authorities or their designated representatives to communicate with each other directly, for the purpose of resolving the matters that might be brought before them.
Please find attached a summary of DTA agreements with SA. Upon request, we can forward you the copy of the DTA with SA and the country you are currently employed in.

Based on the above options, we will need to look at your Salary and Tax Structure taking into consideration your worldwide income, assets and residency status to provide you with the best and most tax efficient option applicable to your situation. We will need a breakdown of your salary, foreign taxes paid, number of days in SA in the last 5 years, have you remained out of SA for 330 consecutive days and do you meet the ordinary residency tests. Worldwide Tax Solutions can then advise you of the tax route that will apply to you so that you are not negatively affected by the looming March 2020 exemption law

South Africa’s expat tax is coming – and there’s only one way to legally avoid it

While National Treasury and SARS scramble for money, a new focus has been placed on the revenue service’s plans to tax South Africans working abroad, who could face having 45% of their earnings over R1 million fed back to government.

Speaking on The Money Show this week, personal financial advisor at Galileo Capital, Warren Ingram said that even though the actual rules around the tax are yet to be finalised, they are planned to come into effect in March 2020.

The new legislation has many expats riled up, with much confusion and uncertainty around the new laws, and many believing that it will not apply to them or that it will be unenforceable.

It has also brought into question whether young South Africans who are working abroad for a short time are tax compliant.

According to Ingram, many South African expats who are working abroad are currently – unintentionally – flouting the country’s tax laws, and may already owe SARS money.

“One thing (expats) don’t do is tell SARS, ‘I am no longer a tax resident’ – this isn’t a process that happens automatically, where you hop on a plane and work outside the country for six months at a time for a couple of years, and you’re fine,” he said.

What expats should do, Ingram said, is inform SARS that they are emigrating from a tax point of view (financial emigration) – but still retaining South African citizenship, passports etc.

Financial emigration is a formal SARS and SARB process to have it noted that you are no longer “ordinarily resident” in South Africa.

This remains the only formal route in law to permanently have a status change noted. This is also the only “formality” which has been noted in the National Treasury Parliamentary response document to the new expat laws, which ensures that the coming tax changes do not apply to South Africans abroad.

According to Ingram, when financial emigration is registered, SARS then treats the situation as if those citizens are selling all their assets in the country (even if they are not) and they need to pay tax on that amount as capital gains tax to give SARS its share.

“That’s the trade-off that you make when you do this financial move out of the country,” he said, adding that after that point, you can settle in another country and do what you do, and you will be okay.

New big expat tax

According to Ingram, if you have not done the financial emigration process outlined above, under the new regulations you will be taxed at a rate of 45% on anything you earn anywhere in the world over R1 million from March 2020.

That’s the “train coming down the tunnel”, he said, but the fact remains that if a South African citizen hasn’t formally financially emigrated, they likely already owe SARS 18% (as Capital Gains Tax) on the money and assets they have accrued overseas.

“So you’re already potentially in trouble,” he said.

The key is in keeping SARS informed because the revenue service treats South African citizens as liable to taxation whether they are in the country or not. If you are a citizen, you must pay your dues.

The coming 45% tax may still be challenged, delayed or reworked, but according to Ingram it’s definitely coming, and will likely get pushed through by government because it’s seen as a tax on the wealthy, which is politically palatable.

“If you’re a politician who cares about the next election and not the 20-year future of the country, this is really appealing, and one I think they are definitely going to drive,” he said.

The unforeseen consequence of this, he said, is that it incentivises skilled South Africans abroad to simply not come back.

“The skilled talent – and we have such a small base – is saying, ‘you know what, I need some experience globally for a period of time, and I will come back’ – and SARS is thinking of a short term gain – let’s tax them.”

“These skilled people will now go ‘hang on, actually why should I come back?’” he said.

According to Ingram, the revenue likely to be collected through the new tax laws will be tiny, but the message sent to professionals and skilled individuals will have a wider-reaching impact.

“Sure, they (expats) benefitted from free (or subsidised) education, and used the country’s services while they were growing up here – but you want these people to come back,” he said.

“These are people who are thousands of kilometres away, consuming nothing in South Africa, with the potential to bring a lot of money back into the country – and now we’re creating a tax incentive for them not to do that.”

Article first published in Businesstech


South Africa’s big expat tax is coming

16 January 2019

In 2017 the National Treasury and SARS announced that they would be introducing major changes in the tax exemption on South African expatriates.

According to Claudia Aires Apicella, head of Financial Emigration at Tax Consulting SA, the legislative amendment is set to come into effect on 1 March 2020.

It states that South African tax residents abroad will be required to pay tax to South Africa of up to 45% of their foreign employment income, where it exceeds the R1 million threshold.

“With the commencement of the new law fast approaching, SARS has begun prosecuting taxpayers that are non-compliant and, in some cases, has the option to imprison the offender up to a period of two years,” said Apicella.

“This is in terms of the Tax Administration Act and with the help of the now fully active Common Reporting Standard (CRS).

“SARS amendments already implemented in preparation of the foreign income tax law change come March 2020 are as follows”:

SARS Interpretation Note 16 (Issue 2) – released February 2017 – Section 10(1)(o) test
SARS Interpretation Note 3 (Issue 3) – released 20 June 2018 – Ordinarily Resident test
SARS Interpretation Note 4 (Issue 5) – released 03 August 2017 – Physical Presence

SARS concerned about expatriate non-compliance

Apicella said that research provided by Treasury and SARS showed that the majority of South African passport holders and permanent residents have simply left the country – without formalising their financial affairs.

“This has prompted not only a law change, but also a stated SARS tax audit focus on those expatriates who have left and simply decided to ignore their taxes,” she said.

“While some did not consider it necessary to submit tax returns in South Africa, others submitted zero tax returns to SARS.

“In some cases, individuals even indicated that they were unemployed on their tax returns while earning expatriate salaries,” she said.

While many expatriates may hope that SARS will drag their feet, the 2017/18 South African tax return already included targeted questions dealing with expatriate tax status, Apicella said.

“The questions may appear innocent enough, but we have seen this trigger an automatic verification or audit process.

“Where the question is marked false, this is a criminal offense, thus creating an even more serious problem,” she said.

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New tax implications for South Africans working abroad – taxed if over R1m p.a.

In broad terms South Africans are generally currently exempt from South African Income Tax if they spend more than 183 full days outside of South Africa during the tax year. More of that below. if you are classified as a South African resident you will be liable for tax on your overseas income.

However in terms of proposed changes the termination of this approach will be somewhat weakened by:

1. the inclusion of a R1 million per year exemption; and
2. the possible further reduction if a double tax agreement applies.

The expected start date is 1 March 2020. In other words only the first one million Rand earned by a person who meets the criteria for exemption, will actually be exempt from income tax. All income earned above the initial R1m will be taxed at the normal rates applicable to individuals. The individual may also be entitled to a reduction, or in practise a refund of their SA income tax actually paid, by offsetting all or part of foreign tax which they may pay on the income. This could take place if they paid tax on the income to a country whic his a party to a so called double tax treaty with South Africa.

Example – take a typical super yacht skipper from South Africa. He or she will be earning a minimum of say US$200,000 per year, equating ZAR3m at current rates. If the exemption applies, and is limited to R1m per year, then R2m of taxable income arises. Typically this will have not have been taxed anywhere, so SA personal tax of approximately R745,000 would arise leaving R 1,255,000 take home pay aftertax. A nasty shock indeed .

SA residents may exit the SA tax net by formally emigrating or ceasing to be tax resident. However there may be Capital Gains Tax implications. Under such circumstances the SA tax payer will be deemed to have sold all of their assets, with the exception of immovable property situated in South Africa, at market value on the date they ceased to be a resident and will accordingly be liable for pay the resultant tax applicable to the capital gain on those assets.

Carefully consider and take professional advice to guide your decisions regarding taxation – income tax, capital gain tax, tax in the countries where you maybe working as early as possible. Tax should not drive your overall decision making, but its best to get it under control, rather than find taxation becomes a nasty surprise and SARS demands it share of off-shore earnings.

Although some overseas income may be exempt in terms of the Income Tax Act, it must be remembered that a person will be treated as a resident for tax purposes if they are either ordinarily resident in South Africa, or if they meet the criteria of the physical presence test. A person will be an SA resident for tax purposes when they meet all of the following criteria regarding the number of days spent in South Africa:

91 days in total during the current year of assessment; and

91 days in total during each of the previous five years of assessment; and

915 or more days during the previous five years of assessment

When is income exempt from South African tax?

Foreign income earned by a tax resident will be exempt from South African tax if the person works as a crew member or officer of a ship which is engaged in the transport of passengers overseas, or in the prospecting, exploration or mining for any minerals from the seabed outside of South Africa. This exemption will only apply if the person was outside of SA for a total of more than 183 full days during the tax year.

In addition, any salary earned by a South African for services rendered outside of SA on behalf of an employer will be exempt – if that person was outside of SA for more than 183 full days (including a continuous period of 60 days) during any 12-month period that started or ended during the year of assessment. This exemption does not apply to income made through contracting, which would be fully taxable.

Treasury has been debating this exemption since 2017 with the initial aim being to repeal it fully. The main reason provided for this proposed amendment was to curb situations of double non-taxation of foreign income such as when an individual’s employment income was not being taxed in either SA or the foreign country.

Relief, concern about revised South African expat tax proposal

There are concerns that for South Africans working in tax havens abroad that a delay in claiming tax credits could effectively lead to double taxation.

Stakeholders have welcomed National Treasury’s relatively softer stance on expat tax, but there are concerns about the onerous process of claiming tax credits and the significant cost implications for some employers.

Treasury previously proposed that a South African tax resident working abroad for more than 183 days a year (of which 60 days were continuous) would in future be fully taxed in South Africa and would only be eligible for a tax credit to the extent that tax was paid offshore. This could have had significant tax implications for some South Africans working abroad, particularly those in low or no tax jurisdictions.

Treasury confirmed in Parliament on Thursday that the proposal would be changed to allow the first
R1 million of foreign remuneration to be exempt from tax in South Africa.

“The exemption threshold should reduce the impact of the amendment for lower- to middle-class South African tax residents who are earning remuneration abroad. The effect of the exemption will also be that South African tax residents in high income tax countries are unlikely to be required to pay any additional top up payments to Sars,” it said.

Patricia Williams, partner at Bowmans, says this is a very welcome change and will significantly mitigate the concerns of the thousands of individuals who have publicly expressed unhappiness about the tax proposal.

“Normal middle-income earners such as teachers, waiters and artisans working abroad should then normally be able to continue to live and work overseas without paying South African tax.”

An online survey conducted by Expatriate Petition Group participants suggests that at least 60% of South African respondents abroad will not be paying any taxes on their employment income. The results were shared with Treasury by the group’s tax technical advisors, Tax Consulting.

Jerry Botha, managing partner at Tax Consulting SA, says these individuals will remain taxable in South Africa on interest, dividends, rental income and capital gains.

He warns however that the vast non-compliance by many South African expatriates abroad has been noted by Treasury and Sars.

“Many expatriates have left and not considered it necessary to submit tax returns in South Africa, submitted zero tax returns to Sars, some even indicated that they are unemployed to Sars, whilst actually earning employment income outside [the country].”

Botha says these individuals are at risk. Government has sent a clear message that they must get their affairs in order.

For corporates considering using South Africa as a gateway to Africa, the proposal will come at an increased cost, tax experts warn.

Tarryn Atkinson, head of employees’ tax and benefits at the FirstRand Group, says if an employer sends employees to a foreign country, and wants to ensure that these employees are not worse off, it will cost a lot more to do so in future.

“It also then creates almost a barrier for people wanting to invest in South Africa when they realise how high the employment costs are going to be should you be sending any of your employees outward from South Africa.”

Atkinson says South Africa has not had a large take-up of the headquarter company regime and the proposed amendments could deter interested parties.

The headquarter company regime was introduced in 2011 to lure multinationals hoping to invest in Africa to South Africa.

There are also concerns about the onerous tax credit system – currently already used by taxpayers on short-term assignments – and that a delay in claiming tax credits could effectively lead to double taxation.

Even where the relevant documentation is available, it currently takes up to two years to get the credits allowed, says Beatrie Gouws, associate director for global mobility services at KPMG.

Atkinson says the difficulty with the tax credit system is manifold. Offshore jurisdictions don’t necessarily have the same tax year as South Africa and taxpayers may not have a tax certificate from a revenue authority in a foreign country to prove that a certain amount of tax was paid.

“If it becomes too difficult to access the tax credit, you are going to end up with a lot of people that are ending up in a double tax situation just because they cannot access the credit by virtue of documentation or substantiation and that I believe is something that we need to try and avoid.”

There are also concerns that the R1 million threshold may be too low in many cases.

The implementation of the proposed amendment – previously scheduled for March 1 2019 – was postponed to March 1 2020.

Williams says the postponement is helpful because it gives taxpayers a chance to take proactive steps, such as to formally emigrate or change their tax residence status, which in relation to countries with a double tax treaty in South Africa is sometimes as simple as giving up their permanent home in South Africa in exchange for a permanent home in the other country.

Shohana Mohan, head of individual and expatriate tax at BDO, says tax residents considering exiting South Africa should look at the facts of their particular circumstances before they take any decisions.

UK IHT – Understanding the Changes for Non-UK Domiciliaries

Nobody likes to think about inheritance tax, for obvious reasons. However, those not domiciled in the UK should consider their overall tax position so that there are no surprises for them or for the beneficiaries of their estate. Indeed, with planning it is possible to minimise the amount of UK inheritance tax (IHT) an individual is liable to. For more information on domicile and UK taxation generally please see our article, Domicile and UK taxation – the Basics.

It is worth noting that UK IHT is not just confined to charges on death – there are potential tax implications to gifting assets to other individuals, or settling assets into trust. There have also been some changes to the UK IHT rules for non-domiciled individuals which we outline below. However, it is always worth seeking specific advice before undertaking a certain transaction to ensure that the UK tax implications have been considered and accounted for.

UK IHT – General Principles

The general rule is that IHT is charged to individuals where the value of their estate decreases by virtue of a “chargeable transfer”. The most obvious example of a charge is on death, when the whole value of an individual’s chargeable estate is charged to IHT. A gift of assets could also result in an immediate charge to IHT, with the most common example being a settlement of assets into trust. However, where a gift of assets is made to another individual, there is a potential charge to IHT only if the donor dies within seven years of making the gift.

UK Doms and UK IHT

UK domiciled individuals are charged to UK IHT on their worldwide estate, meaning that overseas holiday homes and shares in foreign companies are within the scope of the tax. All individuals (wherever domiciled) are entitled to the Nil Rate Band (NRB), which is currently set at £325,000. This means that the first £325,000 of a chargeable transfer is charged to UK IHT at 0%. However, note that the NRB refreshes every seven years, meaning that if an individual makes a chargeable transfer and uses up their NRB, they will not have a new £325,000 NRB available to them until seven yearshave passed.

There are reliefs and exemptions from UK IHT. The main exemption is the spousal exemption – meaning that all transfers between spouses or civil partners are exempt from UK IHT. In the common situation where on the first of a couple to die, all assets are left to the second spouse / civil partner, the second individual can benefit from any
remaining NRB of the first partner. This could give the second individual an available NRB of up to £650,000.

Non-Doms and UK IHT

Non UK domiciled individuals are charged to UK IHT only on UK “situs” assets. This means that from an IHT perspective, there is considerable advantage to being considered a “non-dom” and not surprisingly many have sought to establish themselves as not domiciled in the UK (with mixed success).

Whether an individual is not UK domiciled is not in itself a tax question, but a question of general law. That said, a non-dom who has lived in the UK for an extended period of time may in fact be considered domiciled in the UK under general law, or by application of specific tax law.

From 6 April 2017, a non-UK domiciled individual who has been resident in the UK for 15 out of the previous 20 tax years will be considered UK domiciled for IHT purposes and therefore charged to UK IHT on their worldwide estate. Before 6 April 2017, the test was whether an individual had been resident in the UK for 17 out of the 20 tax years (including the year of assessment). If you fall into this category of individual, the only way for non-UK assets to fall outside UK IHT is to become not UK tax resident. After four complete tax years, you will no longer be considered UK domiciled for IHT purposes, although you will need to remain outside the UK for six complete tax years before you can return to the UK as a non-domiciled individual for UK IHT purposes.

Individuals who have not yet been in the UK for 15 years, or who are considering an investment into UK assets (such as shares in a UK company or a UK rental property) should consider the UK IHT implications and the best options for mitigating any future liabilities.

For those who already live in the UK, it is possible to secure the favourable IHT treatment on non-UK assets for the long term by settling such assets into an overseas trust before becoming deemed domiciled in the UK. HMRC recognise this practice and consider it to be one of the incentives to attract and retain talented individuals in the UK. A trust retains the domicile status of the settlor at the date the trust is settled. This means that the trust will remain non-UK domiciled even after the settlor becomes deemed UK domiciled for IHT purposes. The trust is generally located outside the UK to retain UK income tax and capital gains tax advantages, and it is important not to settle further assets into the trust once the settlor has become deemed domiciled.

For non-UK resident individuals considering an investment in UK property, the UK IHT position should be considered to ensure tax efficient planning. UK IHT is generally charged on the net value of an asset so, for example, if a house was purchased for £1m as a rental property using a mortgage of £800,000 there would be no UK IHT on death provided that the owner had the full NRB available and did not hold any other UK assets (providing that the mortgage was used to purchase the property and not taken out at a later date).

Care should be taken for existing residential properties owned by non-UK residents, because new anti-avoidance rules mean that where debt is subsequently taken out on the property and used such that the funds released are not chargeable to UK IHT, the debt will not be allowed as a deduction when calculating the IHT position. For example, if Mr A purchased a UK property for £1m using cash, but subsequently remortgaged the property to buy a house in Spain, the full £1m would be charged to UK IHT, with no deduction for the mortgage against the property.

Care should also be taken where debt is provided by a “connected party” such as the settlor of a trust, or where overseas assets are used as collateral for a loan to purchase UK property, as in both these situations there could be unexpectedly high IHT bills (in some cases, charging tax on more than the value of the property in question!) and advice should be sought.

Corporate Ownership of UK Residential Property

Before 6 April 2017, a common planning tool for non-UK domiciled investors into UK real estate was to purchase the UK property in a non-UK company. The investor would then hold shares in a non-UK company which was considered as non-UK situs property for UK IHT purposes and not charged to UK IHT on death. Indeed, settling such a company into trust before becoming deemed UK domiciled meant that the UK family home would be protected from UK IHT indefinitely.

However, from 6 April 2017, the rules for such companies (or partnerships) holding UK residential property have changed and the holdings in the company / partnership could now be charged to UK IHT. This is a significant change and means that individuals with such structures will need to revisit any planning to consider their likely exposure to UK IHT and the benefit of changing their arrangements. Note that only UK residential property is caught – if an offshore company holds UK commercial property there is no change to the UK IHT position for the shareholder / partner.

To give a concrete example, Mrs B is not UK resident or domiciled, and holds a rental property in London in her BVI company. Historically, there would be no charge to UK IHT if Mrs B were to die, or to settle the shares into Trust. However, from 6 April 2017, the value of those shares attributable to the UK residential property will be chargeable to UK IHT (i.e. the value of the property less any debt). As ever, the detailed rules are more complicated and Mrs B should seek advice to determine her overall position.

One quirk of the new rules is that debt within the company is apportioned across all company assets, even if it is secured against one particular property. This can give some surprising results, as shown below:

Ms C is not UK resident or domiciled, but holds shares in a BVI company. This company holds rental properties in the UK and around the world. UK properties total £2m with debt of £1.7m secured against the properties. However, other properties around the world are valued at £8m with no debt against the properties. Ms C would expect the net value of the UK property to be £300k, but with the allocation of debt rules, only 20% of the debt would be allocated against the UK properties:
£2m/(£2m + £8m) * £1.7m = £340k. The UK taxable element would therefore be £2m – £340k giving rise to a significantly higher exposure to UK IHT.

It is also worth noting that there have been a number of changes to UK tax law around the ownership of UK residential property by non-residents, companies or partnerships, including higher Stamp Duty Land Tax charges, an annual charge to tax on certain properties owned by a “non-natural person” and capital gains tax charges on non-UK residents disposing of UK residential property. We will be covering this topic in a future article.
How can We Help?

The UK IHT rules are complex and advice should always be sought before action is taken. We have extensive experience in assisting individuals and trustees with tax advice and implementation, advising on the UK tax impacts of assets and whether there are more tax efficient ways to hold such assets.

We are always happy to have an initial telephone consultation or meeting, at no cost to you, to see how we can help.

The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information. Tax legislation changes regularly and information contained herein is provided based on legislation as at 20 November 2017

Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law. We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.