THE EARLY BIRD GETS THE TAX SAVINGS: THE UK SCRAPPED THE NON-DOMICILE TAX EXEMPTION - HERE ARE THE IMPLICATIONS FOR SOUTH AFRICANS ABROAD.php

THE EARLY BIRD GETS THE TAX SAVINGS: THE UK SCRAPPED THE NON-DOMICILE TAX EXEMPTION. HERE ARE THE IMPLICATIONS FOR SOUTH AFRICANS ABROAD

Over 200,000 South African Nationals have physically immigrated to the United Kingdom on a permanent basis. These South Africans, by large, have become tax residents of the United Kingdom. Notwithstanding their physical absence from the Republic, studies have shown that over 70% of South African expatriates retain their retirement savings, mainly in the form of preservation funds and retirement annuities, in South Africa.

THE U.K. NON-DOM TAX REGIME

In an extensible bid to mobilise his constituency, with the UK's upcoming general election looming, Rishi Sunak has taken a bold move to abandon the “non-dom tax regime”. This tax regime has been established through a series of common-law principles dating back to 1799 whereby a U.K tax resident can cite the “non-dom regime” to ringfence their offshore income and capital gains from being subject to the U.K tax jurisdiction. The practical implication is that South Africans who have financially immigrated to the UK and who have ceased tax residency in South Africa were able to shield offshore income and Capital Gains from the UK tax authorities. This is also true of retirement savings and annuities. This will no longer be possible from April 2025 as the U.K. is doing away with the “non-dom tax regime”.

U.K. TRANSITIONAL MEASURES AND THE EXTRACTION OF FUNDS

However,, not all is lost—there is an incentive for South African expatriates to move their assets, income, and savings to the U.K. now while certain transitional measures are in place before the wholesale scraping of the non-dom tax regime.

In this respect, and for those who act soon, non-doms will be able to remit foreign income and assets into the UK at a significantly reduced tax rate of 12% for the next 2 years. In addition to this, those non-doms disposing of their foreign income and assets will be able to do so in a manner that reduces the Capital Gain. The base cost of any foreign assets will be stepped up to their value as they were on the 5th of April 2019 when doing the relevant CGT computations. This offers obvious benefits as property or shares bought in 1990 will be significantly less in terms of its expenditure, as if property or shares bought in 1990 will be significantly less in terms of expenditure, compared to their market value in 2019. Even more salient are shares acquired at a nominal value (i.e. if the taxpayer has stopped the business and issued share capital to himself or shares to himself at a nominal value) and where that company has since increased in value significantly. As such, there is a burning incentive for South Africans who have immigrated to the UK or who are going to immigrate to the UK (and who aim to cease their tax residency) to liquidate and/or dispose of their assets held in South Africa and to remit any foreign income to the UK.

A further change, made in March 2021, relating to South African expatriates accessing retirement funds also affects the means by which such funds can be moved out of the Republic. In terms of the change, South African expatriates will only be able to access retirement funds if they have been a South African non-tax resident for a period of three years post 1 March 2021. The effect is that once a South African ceases to be a South African tax resident, there will be a further 3-year lock-in on retirement savings.

If you are considering financially immigrating to the U.K, there’s also a four-year tax holiday on any non-U.K. income and gains in respect of the funds remitted to the U.K. As such, any eminent move will be facilitated from a fiscal perspective via these concessions.

Considering the above timelines, South Africans would need to prioritise their affairs in terms of obtaining the necessary advice and proceeding with the necessary notices and applications to withdraw their funds before these benefits expire. They can end up paying up to 45% tax on a lump sum withdrawal in the UK.

THE EXTRACTION PROCESS

Whilst the extraction of funds or assets from South Africa does sound enticing, the process has recently undergone a significant alteration in the landscape due to the need to obtain a tax compliance status (“TCS”) verification pin from SARS. This process was previously overseen by the South African Reserve Bank, but due to the recent alteration, the extraction of funds from South Africa is inextricably linked to SARS and tax compliance (the AIT Process came into effect on 24 April 2023).

This AIT process will inevitably be part of any restructuring and/or movement of wealth out of South Africa into the U.K. tax jurisdiction.

CONCLUSION

These new tax regulations and changes present significant challenges for South African expatriates living in the U.K. Understanding and acting on these changes is crucial to avoid severe financial consequences. Professional advice is essential to take advantage of the transitional measures, navigate the relevant tax complexities and to ensure compliance and tax efficiency.

TRM specialises in the field of tax law and specifically foreign tax structuring and the AIT process. South African expatriates abroad can turn to TRM in order to streamline their tax affairs and ensure that the relevant transitional measures and tax complexities are used as advantageously as possible.

Intellectual property disclaimer:
The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.