By Sarah Simson | Consultant Attorney
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 United States and the United Kingdom may be subject to estate or inheritance taxes in those countries, in addition to South Africa's own estate duty.
This is because ‘situs’ – taxes applied on death based on where the asset is considered located for legal purposes – is one of the most overlooked risks in offshore estate planning. It quietly sits in your portfolio and only reveals itself when you pass away, often resulting in significant, unexpected tax bills for your heirs.
Under South African law, tax residents are liable for estate duty on their worldwide assets upon death, currently at rates of 20% for estates under R30 million 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.
Say, for example, you pay 40% tax in the US but would have paid 20% estate duty in South Africa, the most SARS will credit is the 20%. 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.
United Kingdom (UK):
The UK levies a 40% inheritance tax (IHT) 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.
United States (US):
The US estate tax applies at a flat rate of up to 40% on US situs assets exceeding a very modest $60,000 – R1.1 million – threshold for non-resident aliens (NRAs). 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 holds US shares worth $1 million (R18.5 million) at the time of death. The US estate tax bill on these assets is approximately $345,800 or R6.4 million. South African estate duty on the same value, converted to rands, amounts to roughly R3.7 million at the 20% rate. While South Africa’s estate duty treaty with the US allows a credit for the R3.7 million, it does not account for the additional US tax paid, leaving a R3.7 million shortfall and reducing the value of the estate for heirs.
The good news is that with proactive planning, situs risk can be mitigated or even eliminated. Our recommendations include:
1. 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.
2. Investing in non-situs products
Unit trusts, insurance-linked investment wrappers, and ETFs domiciled in tax-efficient jurisdictions may be treated as non-situs even if they hold underlying US or UK assets. Always confirm the situs treatment with your provider.
3. Offshore trusts
When properly established, offshore trusts can ring fence assets from situs exposure — provided the settlor or beneficiaries do not retain control or direct entitlement that triggers attribution rules.
4. Optimising existing holdings
Investors can restructure existing portfolios to move out of situs-heavy holdings. However, this may trigger capital gains tax (CGT), so the trade-off must be modelled carefully.
5. Balancing asset allocation
Maintaining situs asset values at levels where foreign tax exposure is comparable to South African estate duty can reduce the risk of disproportionate tax bills. For instance, keeping US shares below $230,000 could result in tax comparable to the 20% South African rate, instead of pushing into the 40% US rate.
6. Informing your executors
Executors must be informed about situs obligations. Global tax authorities exchange information under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), 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 requiring collaboration between legal, tax, and fiduciary advisors.
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.
Simson is a fiduciary specialist consultant attorney at Thomson Wilks Attorneys
