Offshore beneficiaries of South African living annuities – how to receive your inheritance

Inheriting a South African living annuity can be tricky, especially if you’re living abroad. With complex tax laws, estate duties, and exchange control regulations, it’s easy to get lost in the details. This guide aims to simplify the process, helping you understand your rights and obligations as a foreign beneficiary.

What do you need to know about the rules for living annuity beneficiaries in South Africa?

For many South Africans, a living annuity provides a flexible retirement income solution. When setting up a living annuity, as the policyholder, you can nominate beneficiaries who will receive the remaining funds upon your death.

• Primary and secondary beneficiaries: You can nominate both primary and secondary beneficiaries. Primary beneficiaries will receive the benefit if they survive you. Secondary beneficiaries will only receive the benefit if all primary beneficiaries predecease you.
• Nomination: You can nominate beneficiaries on the initial application form or at any later stage. It’s essential to keep your beneficiary nominations up-to-date.
• Beneficiary types: You can nominate individuals or trusts as beneficiaries.
• Tax implications: The beneficiary’s tax liability will depend on how they choose to receive the funds.
  – If the beneficiary opts for a lump sum, it will be subject to retirement fund tax.
  – If the beneficiary continues the living annuity, their income will be subject to their income tax.

What happens to a living annuity on death?

By nominating beneficiaries to your South African living annuity, you can ensure that the funds bypass your estate, avoiding potential estate duty and executor fees. However, if no beneficiaries are nominated, the funds will form part of your estate, and the distribution will be governed by your will or the rules of intestate succession.

How do foreign beneficiaries receive their inheritance from a South African living annuity?

1. Ensure you are named as a beneficiary in the living annuity policy. Prepare necessary legal documents like your passport or birth certificate for identity verification.
2. Notify the financial institution of the policyholder’s death. Provide required documentation, such as death certificates. The institution will conduct due diligence checks to verify your identity and assess your tax residency status.
3. If approved, the funds will be converted into your preferred currency. The financial institution may offer various payment methods like direct bank transfer or issuing a cheque. Adherence to South African exchange control regulations is vital throughout the process. Be aware of potential tax implications in South Africa and your country of residence.

Remember, the processing time can vary, so patience is key. It is good to consult with legal and tax professionals with expertise in both countries to understand specific regulations and potential tax implications. Effective communication with the financial institution is essential for a smooth process.

What are the tax implications of receiving an inheritance from a South African living annuity as a beneficiary living abroad?

The tax implications of receiving an inheritance from a South African living annuity as an offshore beneficiary depend on several factors, primarily your tax residency status and payment method.

If you choose to receive the living annuity inheritance as a lump sum:

• South African tax: The lump sum will be subject to South African retirement fund lump sum tax, regardless of your residency status. This tax is progressive, with higher rates applied to more significant amounts.
• Foreign tax: Once the funds are transferred to your country of residence, they may be subject to local income tax laws. However, double taxation agreements between South Africa and your country of residence may mitigate or eliminate this tax.

If you choose to continue the living annuity in South Africa:

• South African tax: As a non-resident, you will be subject to South African income tax on the annuity payments received. However, the tax rate is generally lower than the domestic tax rate.
• Foreign tax: The annuity payments may also be taxable in your country of residence, depending on your local tax laws and any applicable double taxation agreements.

Sticking to South African exchange control regulations is vital, especially if the inheritance amount exceeds annual exchange control allowances. Consulting with a tax advisor is worthwhile to understand the specific tax implications and optimise your tax position in South Africa and your country of residence. Familiarise yourself with any double taxation agreements, as these agreements can help mitigate or eliminate double taxation.

How does all of this work in real life? Let’s look at a hypothetical scenario as an example:

Leonie is a South African expat and lives in Sydney. Her mother has recently passed away, and Leonie is the beneficiary of her living annuity. However, Leonie has never tax emigrated from South Africa. How can she arrange to have her inheritance from her mother’s living annuity paid out to her offshore?

As a South African expat living in Sydney without tax emigration, Leonie’s situation presents a complex scenario regarding inheriting her mother’s South African living annuity.

Leonie’s tax situation will depend on whether she’s still considered a South African tax resident. She may need to file a South African tax return if she is. However, her mother’s estate might be subject to estate duty. Even if she’s not a South African tax resident, she might still owe tax on income or capital gains from South African sources, such as the living annuity. Leonie should consult a tax advisor to understand her situation and tax implications.

To receive the inheritance offshore, Leonie must provide the necessary documentation to the financial institution managing the living annuity. This may include proof of her identity and address and evidence of her tax residency status. This may mean completing tax emigration at this stage to obtain a Non-Resident Confirmation Letter from the South African Revenue Service (SARS). Not only will this clarify her tax residency status, but it will also terminate her tax obligation to South Africa moving forward.

The financial institution will need to conduct due diligence to ensure compliance with South African exchange control regulations and tax compliance. This may involve verifying Leonie’s foreign address and obtaining necessary approvals from the South African Reserve Bank (SARB). Leonie will need SARS’s approval to transfer the proceeds out of South Africa. This is known as an Approval – International Transfer application.

Read more about living annuities in South Africa:

• What happens to my living annuity if I emigrate from South Africa?
• Can you cash in your South African living annuity?
• Annuities in South Africa: Living Annuity vs Life Annuity

FinGlobal: providing cross-border expertise for expats since 2011

To streamline the process and minimise potential tax implications when attempting to access an inheritance as a foreign beneficiary to a living annuity in South Africa, you should seek professional advice. FinGlobal is ready to step in and handle it for you. Our team includes certified international financial planners, lawyers, chartered accountants, tax specialists and bankers providing expertise in all areas of cross-border finance, ready to help you clarify your tax residency status and advise on the best way to structure the inheritance while assisting with the necessary paperwork and regulatory compliance involved in moving your money offshore.

We know how complicated cross-border inheritances can get. That’s why the most brilliant move you can make is to partner with FinGlobal. Our professional guidance will ensure a smooth and compliant process from start to finish. Contact us today to get started.