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Many South Africans are tempted by the prospect of investing in property overseas. Earning a rental income in foreign currency is seriously appealing.

It may also be reassuring to know you’ve got somewhere else to live if it ever comes to that. But it’s essential to understand that you don’t immediately have residential rights in another country because you own property. (The same applies to foreigners investing in South African properties.)

What’s more, from a tax and estate planning point of view, buying offshore property is not nearly as easy as it looks. And it changes from country to country.

Death and taxes

Let’s start with the bad stuff… Each country has its own inheritance laws. If you’re not careful, your heirs could easily end up paying both South African estate duty and foreign inheritance tax on your foreign property.

In South Africa, estate duty is payable upon death. The first R3,5 million (per person) is exempt, but after that point, your heirs will be taxed at 20% for the first R30m and 25% above that. Remember that the value of the dutiable estate includes all worldwide assets – including any overseas property.

Currently, South Africa has agreements to prevent double taxation of inheritance taxes with the UK, the US and some southern African nations. But if you buy property in countries that aren’t on the list you may face double taxation.

And it gets even more complicated. In South Africa, we have freedom of testation. This means that you can leave your assets to whomever you please. But many European nations have forced heirship rules which specify that a set percentage of the estate must go to specific people (usually your spouse and/or children).

Luckily, there are sometimes ways around these rules for foreign citizens. However, it’s vital to make sure of this before buying property in a foreign country. If you’re planning on investing in offshore property, even in a country that doesn’t have a forced heirship regime, it often makes sense to draft a second ‘offshore’ Will. This document should be prepared by an international taxation specialist who knows the ins and outs of inheritance law in both South Africa and foreign jurisdictions. Failing to do this can result in nasty surprises.

Income Tax and Capital Gains Tax

Luckily, it’s much easier to avoid double taxation on income tax on rental income and CGT on the gain when selling a foreign property, as South Africa has income double tax agreements with most major nations. These typically assign tax rights to one or both countries. If there’s no DTA with the country you’ve invested in, you can also claim a foreign tax credit from SARS, with certain restrictions.

The bottom line

Before you splurge on that Mediterranean bolthole, be sure to do your homework. Buying foreign property can be a wonderful experience for your family and bank balance. But there’s more to the dream than simply being able to afford the purchase price.

We strongly recommend speaking to your financial advisor before investing in foreign property.