The hidden tax that could gut your offshore wealth

With global investment opportunities becoming increasingly accessible, more South Africans are diversifying their wealth across borders. However, many are unaware that assets held in jurisdictions such as the US and the UK may be subject to estate or inheritance taxes in those countries, in addition to South Africa’s own estate duty.

This is because “situs” is one of the most overlooked risks in offshore estate planning. Situs tax is a levy imposed by the country where an asset is legally considered to be located, regardless of the investor’s place of residence. It quietly lurks in your portfolio and only becomes visible on death – often leaving heirs with unexpected, significant tax bills.

Under South African law, tax residents are liable for estate duty on their worldwide assets upon death, currently at rates of 20% for estates with a value of less than R30m and 25% for the portion exceeding that threshold. However, other jurisdictions also impose death taxes on assets deemed to be situated within their borders, or situs assets. This can lead to double taxation unless appropriate relief exists through estate duty treaties. 

South Africa has such treaties with both the US and UK, but the protection they offer has limitations. While these treaties help prevent outright double taxation, they don’t always eliminate the financial pain. South Africa will only allow a credit for foreign taxes up to the amount of local estate duty payable on the same asset. If the foreign tax is higher – which it often is – your estate still bears the shortfall. 

For example, if you pay 40% tax in the US but would have paid 20% estate duty in South Africa, the most the South African Revenue Service will credit is the 20% tax rate. You will still be out-of-pocket for the additional 20%, making your effective death tax rate 40%, not 20%.

What’s more, estate duty treaties do not apply automatically: your executor must actively claim the credit and provide proper proof. 

Key risks for South Africans

In the UK

The UK levies a 40% inheritance tax on UK situs assets exceeding the £325,000 nil-rate band. Transfers between spouses are exempt, and unused portions of the nil-rate band can roll over to a surviving spouse, potentially doubling the threshold to £650,000.

In the US

The US estate tax applies at a flat rate of up to 40% on US situs assets exceeding a very modest $60,000-R1.1m threshold for non-resident aliens. Unlike the UK, there is no spousal rollover unless your spouse is a US citizen. US situs assets include shares in US-listed companies, US real estate and even cash held in US brokerage accounts. This means that a South African resident with more than $60,000 in US shares – regardless of whether they were purchased via a local platform or a foreign nominee – may be liable for US estate tax.

Here’s a common scenario to illustrate the potential impact:

A South African investor held US shares worth approximately $1m (R18.5m) at the time of death. The US estate tax bill on these assets is roughly $345,800 or R6.4m. South African estate duty on the same value, converted to rand, amounts to approximately R3.7m at the 20% rate. While South Africa’s estate duty treaty with the US allows a credit of the R3.7m, it does not account for the additional US tax paid, resulting in a R3.7m shortfall and reducing the value of the estate for heirs.

Practical steps to minimise situs exposure

The good news is that with proactive planning, situs risk can be mitigated or even eliminated. Our recommendations include:

• Using estate tax ‘blockers’: Holding US or UK assets through offshore companies based in neutral jurisdictions (such as the British Virgin Islands or Mauritius) can effectively remove the situs risk, as shares in these companies are generally not considered situs assets in the US or UK.
• Investing in non-situs products: Unit trusts, insurance-linked investment wrappers, and exchange-traded funds domiciled in tax-efficient jurisdictions may be treated as non-situs entities, even if they hold underlying assets in the US or UK. Always confirm the situs treatment with your provider.
• Offshore trusts: When properly established, offshore trusts can ringfence assets from situs exposure – provided the settlor or beneficiaries do not retain control or direct entitlement that triggers attribution rules.
• Optimising existing holdings: Investors can reorganise their existing portfolios to reduce holdings that are heavily concentrated in a particular situs. However, this may trigger capital gains tax, so the trade-off must be carefully modelled.
• Balancing asset allocation: Maintaining situs asset values at levels where foreign tax exposure is comparable to South African estate duty can help mitigate the risk of disproportionate tax bills. For example, keeping US shares below $230,000 could lead to a tax liability similar to the 20% South African rate, rather than surpassing the 40% US rate.
• Informing your executors: Executors must be informed about situs obligations. Global tax authorities exchange information under the Foreign Account Tax Compliance Act and the Common Reporting Standard, and your executor may face penalties or personal liability if they fail to comply with foreign tax laws. 

Situs underscores why estate planning for offshore investments is not a one-time event, but an ongoing process that necessitates collaboration among legal, tax and fiduciary advisers.

Offshore investments offer tax efficiency, diversification and wealth protection – but if poorly structured, even the best investment plan can be undone by surprise tax bills. Estate planning is not only about passing on what you own. It’s about protecting it from unnecessary erosion.

Sarah Simson is a fiduciary and estate planning specialist who advises on generational wealth. She is a registered FAIS representative and a member of STEP, SAIT and the Legal Practice Council.