South African (“SA”) residents for tax and exchange control purposes, often hold bank accounts or investment accounts (“accounts”) jointly with family members (spouse and/or children) in other jurisdictions, for instance in the United Kingdom (“UK”).
Where a single account is jointly owned by two persons in joint tenancy, they each own an undivided and equal share of the account. The right of survivorship is applicable, whereby on the death of one of them, the deceased’s one-half share of the account is transferred to the survivor. The transfer hereof to the survivor will happen without probate being necessary, and without a direction or bequest to this effect in a Last Will and Testament of the first dying owner. One of the owners can have the sole right to transact on the account while he/she is alive or can have sole signing powers on the account while he/she is alive.
What is often overlooked by SA owners in joint tenancy, is the possible tax and exchange control consequences in SA of their joint ownership of the account.
Example:
A SA person externalizes R10 million by way of foreign investment allowance from SA after obtaining her tax clearance from SARS.
She transfers the full amount into an account in the UK and adds her SA husband and two SA adult children as joint account holders with her on the account as owners in joint tenancy. She is the sole signatory on the account while she is alive. She dies and the institution where the account is held, transfers the account to the names of her husband and 2 children on receipt of her death certificate from the executor of her estate in SA.
Tax in SA:
On her death, SARS audits the income tax return and estate duty return in her estate. SARS queries why the executor did not include 100% of this account in the estate duty return in SA. The executor argues that the deceased was the owner of only 25% of the account as co-owner in equal shares and therefore they only included 25% of the account in the estate duty return in SA. SARS now requires proof that she in fact donated 25% of the account to her husband and 25% thereof to each of her children before her death, which the executor is not able to produce. SARS argues that donations tax should have been paid on the donation of the portions to her children. The donation to her husband would be donations tax free as between spouses.
Exchange control in SA:
The SA Reserve Bank (“SARB”) is notified of the account by SARS on her death and they query the fact that she made three quarters of her foreign investment allowance amount available to three other SA residents, which is in contravention of exchange control regulations in SA, and the SARB levy heavy penalties on the transaction, now payable by her estate.
If the following documentation and processes are followed, accounts held in joint tenancy by SA residents are still advantageous:
The statement of ownership in joint tenancy must be in writing, clearly indicating that all the essential elements thereof are present.
In the event of a donation to a spouse in terms hereof, a signed deed of donation with both parties thereto having signed it, should be sufficient as proof thereof.
In practice, the SARB may allow a spouse to make a foreign investment allowance available to the other spouse.
Children should not be added as joint account holders.
A Will dealing with the joint accounts is not necessary and application need not be made for probate to transfer the account to the spouse.
The process after death of one account holder is simplified and sealed copies of the Will and letters of executorship need not be obtained from the Master of the High Court in SA.
Joint account holders need to be aware thereof that joint tenancy accounts are not necessarily a magical solution for all to alleviate estate duty, or to do away with the need for probate or the need for a separate offshore will dealing with offshore accounts.
Documentation still needs to be put in place and the advantages hereof are mainly there for spouses and on the first dying of them. Also keep in mind that, when spouses as joint account holders die together, a Will dealing with the bequest of the joint account will still be necessary.
We draft offshore Wills and documentation to put your joint account to the best use and in the most practical way. Kindly contact marteen@fidelisvox.co.za or tamryn@fidelisvox.co.za to assist you herewith or for further advice in your specific circumstances.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)