WITH the recent relaxation of exchange controls for both individuals and corporations, many South African property investors are looking overseas to diversify their property portfolios.

Good opportunities are available for South African investors to invest in various classes of property abroad, says Paula Bagraim, director: tax for Stonehage Financial Services

“With prices significantly down from their high points and property markets in many countries at an inflection point, foreign property purchases continue to be an effective hedge against currency risks.”

South African resident individuals are permitted, on application to the SA Reserve Bank, to invest in a holiday home or farm in any country that forms part of the Southern African Development Community (SADC).

As there is no limit on the amount that can be invested in a property in an SADC country, individuals do not have to make use of their foreign investment allowance, but certain restrictions are placed on these purchases by the Reserve Bank, says Bagraim.

The proceeds on disposal of the property — and any net rentals earned during the currency of the investment — must be remitted to SA. Any rental income earned will be subject to tax in SA and capital gains tax may be payable on the disposal of the property. The property will also fall into the investor’s South African estate for estate-duty purposes.

Bagraim says that should the investor wish to hold the property through a corporate vehicle or a trust in the SADC country, this will need to be placed on record with the Reserve Bank as the transfer of funds will only be authorised if the acquisition is made in the name of an individual.

Aside from potential good value, certain SADC countries such as Mauritius and the Seychelles attract South African investors, she says. Residence is offered where property is acquired through certain integrated resort schemes.

“For those wishing to emigrate formally from SA this becomes an attractive option as the Reserve Bank will not approve an application for emigration unless the emigrant is able to demonstrate that he has the right to reside permanently in another country.”

She says that should South African resident individuals wish to invest in property outside the SADC area they will need to utilise their R4m foreign investment allowance to part finance these acquisitions.

Nisha Ramnath, of BoE Private Clients, says that the predicted long-term performance of the rand is in itself a compelling reason to acquire offshore assets.

South Africans invest offshore for a number of reasons, she says. They may seek foreign exposure as part of a diversified investment portfolio, they may want to mitigate an element of political risk, or they may have overseas family ties.

Ramnath says that the general consensus is that the rand will depreciate in nominal terms against leading world currencies over the long term owing to higher inflation compared with the rest of the developed world.

As South Africans become more comfortable with acquiring offshore assets, proper estate planning should take into account the reason for the offshore exposure as well as the intentions of the testator and family circumstances, she says.

South African residents generally have to account for estate duty at the rate of 20% on their worldwide assets.

“There are certain exceptions for people not ordinarily resident in SA at the date of death, and deductions in respect of foreign property acquired by the deceased before becoming ordinarily resident in SA for the first time.”

There is also relief in certain instances where the asset is taxed twice, that is in the foreign jurisdiction and in SA. Thus proper disclosure allows for forward tax planning, she says.

Source: Business Day