A trust is a useful succession tool that can protect beneficiaries and allow the founder of a
trust to build core values and principles into trust documents for the benefit of family.
It not only protects your family wealth by preserving your legacy but also creates wealth to
be passed down for the benefit of future generations and distributed to beneficiaries
according to your wishes, in years to come.
However, the number of South Africans relocating abroad (for various reasons), has
increased dramatically, resulting in a multitude of tax consequences when it comes to
distributions to these beneficiaries from a South African trust.
For example, a beneficiary of a South African trust living and working in the UK may be
‘resident’ in the UK for tax purposes but not domiciled in the UK which impacts the UK tax
liability and entitlement to UK Income Tax allowances and exemptions.
So what does it mean?
If you’re UK resident but not domiciled in the UK, i.e., you currently enjoy non-domicile status
(also known as “Non-Dom”) with special rules which apply to such person’s foreign income
and gains.
Under the present UK tax system, a person can claim Non-Dom status if you were born in a
different country from the UK or if your father came from a different country. In simple terms,
an individual is regarded ‘domiciled’ in the place they consider to be their permanent home
and where they have the closest ties. It is a concept that is separate to nationality and legal
residence or citizenship.
The Non-Dom status currently allows South Africans whose place of “domicile” is outside
the UK to enjoy a favourable regime. In these circumstances one has got a choice of whether to use the arising basis of taxation or the remittance basis of taxation.
If you choose to use the remittance basis for a tax year you will pay UK tax on any of your
income and gains which arise or accrue from a source in the UK (for example your salary
earnings) and so much of your foreign income and gains that you, or another relevant
person, brings (or remits) to the UK, even if that remittance occurs in a later tax year.
With effect from 6 April 2025 the UK Non-Dom status will be phased out for income and
capital from foreign sources, replacing it with a residence-based administration.
Furthermore, it will also bring foreign earnings into the UK inheritance tax system.
Many countries take a hostile view of foreign trusts, and many civil law countries do not
recognise the concept of a trust. Distributions from South African trusts to people who have
taken up foreign tax residency without knowing it, may have severe tax consequences in
such other jurisdiction.
USA beneficiaries of a foreign non-grantor trust who receive distributions from the trust are
subject to U.S. federal (and state) income tax upon receipt of trust distributions to the extent
of the pro-rata share of the trust's net income earned.
The IRS in the USA, HMRC in the UK and the ATO in Australia have draconian anti-avoidance rules to address most of the tax planning structures in South Africa in terms of which residents in these countries may benefit from a South African trust.
Therefore, a beneficiary of a South African resident trust who is resident in another part of the world can end up in an unintended and complicated tax dilemma. The result thereof is that these beneficiaries may be liable for tax in their country of residence on (their worldwide) income and gains received from a South African trust.
To add to that, with effect from years of assessment commencing on or after 1 March 2024,
the South African Income Tax Act was amended to restrict the application of the conduit
principle to South African resident beneficiaries.
Consequently, as from this date, amounts received by or accrued to a South African resident
trust, to which non-resident beneficiaries have a vested right, are now subject to normal
(income) tax in the hands of the SA resident trust making the declaration.
Those affected by these tax rules are recommended to seek expert advice and
should also consider the tax implications of beneficiaries in their country of
residence.
BH Groenewald
SGN Konsult (Pty) Ltd
6 January 2025
Comments