Since Covid-19, there has been a noticeable rise in the number of South Africans returning from the UK.
Currently, South African professionals are actively exploring overseas opportunities and often come back home after accumulating offshore assets.
Moreover, an increasing number of UK citizens are relocating to South Africa, drawn by the appealing lifestyle, lower living costs, and favorable climate.
These changes carry significant tax implications.
Cross-border estate planning now involves more than merely where assets are located.
Families with ties to both the UK and South Africa should consider several factors:
- Their residency status;
- The UK’s Long-Term Residency regulations;
- The potential inheritance tax (IHT) ‘tail’ after leaving the UK; and
- South Africa’s residency-based estate duty rules, along with how treaties allocate taxing authority.
Differences in estate tax
The UK and South Africa have differing approaches to estate taxation.
The UK imposes IHT at a rate of 40% on amounts that surpass the available allowance, while South Africa imposes estate duty at 20%, increasing to 25% for estates valued above R30 million, with various exemptions and deductions.
According to the new long-term residency test in the UK, individuals who have been UK tax residents for 10 or more of the last 20 tax years might still be subject to UK IHT on global assets, even if they no longer satisfy previous residency criteria.
Simply leaving the UK does not end tax liability.
An IHT ‘tail’ can keep global assets subject to UK tax for up to 10 years, based on an individual’s UK residency history.
The IHT tail refers to the seven-year period following a gift made during one’s lifetime, where such a gift may incur IHT if the donor passes away within that timeframe.
South Africa employs a residence-based estate duty framework. Those who are ordinarily resident in South Africa may be liable for estate duty on worldwide assets, while non-residents typically face liability only for assets located in South Africa.
The 1979 UK-South Africa treaty generally prevents full double taxation, but it emphasizes the importance of seeking professional advice.
“Understanding the tax responsibilities of returning to South Africa from the UK can be complex, and discussing it may feel uncomfortable, but a lack of clarity regarding tax management can lead to significant errors,” warns Julian Adshade, director at the cross-border financial services firm Sable International.
South Africa utilizes a residence-based tax system, meaning once you become a South African tax resident, the South African Revenue Service (SARS) has the authority to tax your entire global income and capital gains, not just income generated within South Africa. Conversely, non-residents are generally taxed solely on income derived from South Africa.
Understanding tax residency is essential
Before evaluating investments, properties, pensions, or tax returns, it’s crucial to determine your tax residency status, according to Adshade.
“SARS assesses individual tax residency via two main tests: the ordinarily resident test and the physical presence test. The ordinarily resident test checks whether South Africa is your true or habitual home—the place to which you would naturally return. The physical presence test considers the number of days spent in South Africa during the relevant tax years.”
For those returning to South Africa, the ordinary residence test often takes precedence.
If you come back intending to once again make South Africa your primary or permanent home, you may become a South African tax resident from your return date, even before the physical presence requirement is fully met.
Here are two common misconceptions that Adshade notices among returning South Africans.
Mistake 1: Believing UK income is only taxable in the UK
One common misconception is that UK income is exclusively taxable in the UK. This is not always the case.
If you are a South African tax resident receiving UK rental income, employment income, dividends, interest, or pension income, you may need to report that income in South Africa.
The UK-SA Double Taxation Agreement (DTA) clarifies which country has primary taxing rights and how relief from double taxation is granted. However, a DTA does not generally mean that income can simply be ignored in South Africa.
Mistake 2: Misinterpreting ‘double tax agreement’ as ‘no tax’
Double tax agreements are often misunderstood. Their purpose is to avoid double taxation of the same income without relief, not necessarily to exempt foreign income from taxation.
When a double tax agreement is in place, the first step is to examine the specific treaty article relevant to that income—whether it is employment income, rental income, pensions, dividends, or interest.
For returning South Africans, this means UK income may still need to be reported to SARS, even if it has already been taxed in the UK.
Proper management typically involves applying the UK-South Africa double tax agreement to identify the relevant taxing rights and any remaining South African tax obligations.
In some cases, there may be no additional tax due in South Africa, but the obligation to report still remains.
Practical steps before returning to South Africa
- Determine when you anticipate regaining South African tax residency;
- Assess if you will maintain UK tax residency for part of the year;
- Compile a list of your income sources, including salary, rental income, dividends, interest, pensions, and withdrawals from investments;
- Obtain valuations for offshore assets, such as UK property and investment portfolios;
- Review UK ISAs (individual savings accounts) and other UK tax-efficient investments;
- Decide whether UK pensions should remain intact, be accessed, or require restructuring;
- Investigate the availability of foreign tax credits for UK taxes already paid;
- Keep organized records of offshore capital, income, acquisition costs, and valuations; and
- Align UK and South African tax filings to avoid discrepancies.
Returning to South Africa can be a wise lifestyle and financial decision, especially for those coming back from the UK with international assets, pensions, and investments. Nonetheless, adequate planning is crucial, as highlighted by Adshade.
“The most significant tax errors typically arise from misconceptions about residency, incorrect assumptions about UK tax rules applying in South Africa, failure to disclose offshore income, and neglecting to obtain valuations for offshore assets upon return,” he warns.
“It’s vital to review your tax situation before moving, not wait until SARS begins inquiries.”
Brought to you by Sable International.
Moneyweb does not endorse any product or service advertised in sponsored articles on our platform.
