Investing in offshore property as an asset class is a sound way to externalise your wealth and have a balanced portfolio, but make sure you have been well advised on local real estate customs and tax laws.
It’s become fairly common for high net wealth families to own homes in other countries, whether it’s a buy-to-let investment, an occasional residence for visiting children who are studying overseas or for retirement. The benefits of having an international property in your portfolio includes:
- Long term wealth generation
- Income generation
- Tangible investment with capital appreciation
While it’s an exciting and sound option, purchasing, financing and managing an international property portfolio can be full of pitfalls, red tape and stress which is why investors should always seek the services of a professional advisory firm. The experience and services offered by international property investment advisors goes way beyond the traditional functions of a real estate agent. Here are some of the intricacies you need to consider:
You need to be aware of the legal and tax implications of purchasing an offshore property. South African tax residents are required to pay tax in South Africa on their foreign income so any rental income earned on your offshore property may remain there, but it will be taxed here. There are certain exemptions allowed by our residency-based system as well as double taxation agreements with some countries, which give you credit for foreign taxes paid. How you are taxed in the country where you own property is subject to their laws, as well as whether you use the property occasionally or keep it as an investment.
You’ll also need to learn about tax rules associated with owning rental property. In some countries you’ll have taxes withheld from your rental income and in others you will need to file taxes separately for rental income.
Inheritance Tax or Estate Duty
Different countries have different inheritance tax laws. In South Africa, inheritance tax is called estate duty. If you die, your foreign investments will be part of your South African estate and you will have to pay estate duty. The amount is calculated based on the value of your assets and whether or not double taxation agreements are in place. If you have assets registered in another country you may have to pay estate duties even if you’re not a resident of that country. For example, as a resident and taxpayer in South Africa, you’re still liable for UK inheritance tax if you own property in the UK. Depending on the country, you may be able to reduce or prevent double inheritance tax. Although South Africa has double tax agreements with some countries, including the US and the UK, these agreements do not necessarily mean that you will not be liable for estate duty. If no agreement exists between South Africa and the country you plan to invest in, enquire about claiming a foreign tax credit, keeping in mind that this credit is limited to taxes paid in South Africa. The same principles could apply to capital gains tax if the foreign property is sold. “But, once again, capital gains differ from country to country, so the need to seek professional advice cannot be stressed enough,” warns Brad Bendall, Group Sales Director at Carrick.
If you have assets offshore, you can include them in your South African will or draw up a separate will for the country in question. You should get advice from a professional to ensure that all estate duty implications have been considered, your tax burden is minimised, your will is valid across jurisdictions and that your foreign will doesn’t contradict your South African will. Many countries in the EU have forced heirship rules, so if you have assets in one of these countries, as a South African resident, you may be restricted as to who your assets go to. Depending on the location of the property, you might be able to make use of the European Succession Regulation, which allows you to choose between the succession law of the country in which the property is situated or the law of your country of nationality.
Maintenance and Repairs
Maintenance issues in a foreign country can be challenging, particularly if you don’t live there or don’t speak the language. “Investors need on-the-ground local knowledge to mitigate potential pitfalls and to access solutions,” advises Bendall. “My primary suggestion would be to ensure you use a letting agent and a reputable company.” You should also consider insurance for loss of business in the case of rentals, as well as for structural repairs like walls, fences, garages, etc.
If you’re purchasing an investment property you won’t need to establish residency, but check visa restrictions on how many days you can spend in the country. If you plan to retire or work abroad, enquire about qualifying for permanent residency.
“The most important advice is to take your time and do your homework,” says Bendall. “Ensure the investment case is solid and only deal with a reputable company. Employ the services of a trustworthy rental agent, consider all the different anomalies in the purchase of that property and get solid legal advice.”
By leveraging our joint expertise, Carrick Property provides investors with an end-to-end service that includes due diligence relating to property developments, their investment potential and locations; assistance with securing financing; arranging local lawyers to handle the transfer of a property and the associated legalities; securing tenants; handling day-to-day property management; and arranging future resale if required.