CROSSING BOUNDARIES

Peter Gilmour, Chairman of RE/MAX of Southern Africa, looks at the investment potential and pitfalls of international property ownership 

It is common knowledge that a diverse property portfolio is a sound one. However, if you are considering investing in property abroad, there are many factors that need to be carefully considered first, as they might affect your final decision. 

Investing in offshore property

The South African Reserve Bank (SARB) administers South Africa's system of exchange control, which means that South Africans can only export capital within approved limits. Explains Peter Gilmour, Chairman of RE/MAX of Southern Africa: "South African residents with a tax clearance certificate are only allowed to export an aggregate amount of R2-million for foreign investment purposes. This is a lifetime offshore limit, without recourse to South Africa and it may not be used to invest back in South Africa."

With the current rate of exchange however, R2-million won't get you very far with regards to overseas property investments, so what are your funding options? Gilmour explains: "In terms of SARB legislation, you may raise a mortgage on the offshore property, as long as you do not provide any South African assets as collateral. In other words, only your offshore asset(s) may be used as collateral against an offshore bond. Any offshore inheritances and salaries paid to you if you worked offshore may be used to purchase offshore property. You may want to syndicate your funds, normally via an offshore trust, where family members contribute their R2-million investment allowances to a discretionary trust, which then in turn purchases the property."

The R2-million limit can pose major problems, warns Gilmour: "If an investor, having used the R2-million allowance, runs into a troublesome situation, for example their flat in London cannot be let for a couple of months and there is no rental income or cash reserve to contribute towards the mortgage, funds will have to be borrowed offshore, with no recourse to South Africa. Of course, a special application can be sent through to the SARB to support an investment beyond the R2-million limit, but these are few and far between. 

Another alternative is for investors to use their annual discretionary allowance to help them through a sticky situation or to top-up their foreign investment allowance."

Each South African resident, who is over 18, also receives a single annual discretionary allowance of R500 000, which has been designed to be used for travel, gifts, donations and maintenance. Under-18 residents are granted an annual travel allowance of R160 000. You need no tax clearance certificate to qualify for the discretionary allowance, as it is considered to be a ‘consumption' allowance on a ‘use it or lose it' basis, meaning it cannot be carried over from one year to the next.  

How to hold an offshore asset

Before one makes an offshore purchase, consideration needs to be given to the structure that should hold this asset. Says Gilmour:  "There are three ways of holding an offshore asset, namely holding it in your own name, purchasing it in a trust, or purchasing it in an offshore company."  He explains that there are pros and cons to each structure: "Holding the asset in your own name is beneficial from an administrative cost perspective, however, there are estate duty implications that would need to be considered. Holding the asset via an offshore trust can be accomplished in two ways - via a loan to the trust, or via a donation to the trust, which would lead to donations tax which is currently 20%. However, transfer pricing issues could arise during international transactions. Holding the asset in a company's name is another option and guidance should also be sought as to whether the transaction should be by donation or loan." 

Tax implications

As a South African resident, any rental income earned on the property may be retained abroad, but will be fully taxed in South Africa. Explains Gilmour: "On your South African income tax return, you will receive foreign tax credits relating to the extent that you have paid tax offshore on the rental income. If, however, you are making a loss on the offshore property, this loss would be ring-fenced and may only be offset against other foreign income or carried forward and offset against any future foreign income." 

He also advises that capital gains tax ought to be considered: "If you are a resident in South Africa at the time of sale of the offshore property, capital gain will be calculated by taking the foreign base cost, less the foreign proceeds, and multiplying the difference by the average exchange rate for the year of sale. The raising of an offshore bond could also lead to capital gains tax, as the foreign debt may attract capital gains under the section dealing with currency gains. This is an intricate piece of legislation that should be carefully examined prior to deciding to use an offshore bond." 

Investing in property within the SADC region

Founded in 1992, the Southern African Development Community (SADC) includes Angola, Botswana, the DRC, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. Says Gilmour: "In terms of SARB legislation, South Africans may purchase property in the SADC region and this investment will not count towards their R2-million foreign investment allowance. An application to invest in property within the SADC region requires the potential investor to fill in an application through their local bank, which will then be forwarded to SARB and if all goes according to plan, it ought to be processed within four to six weeks." 

He says that although there is no limit to the amount of money that can be used to purchase property in the SADC region, there are however, limitations and restrictions on what you may do with the property. "There are four major restrictions and limitations with regards to investing in the SADC region. Firstly, the property must be registered in the investor's own name - no entities or trusts may be used. Secondly, the property must be for their sole personal use - in other words, investors may not rent the property out or use it for commercial purposes. Thirdly, on sale of the property, all the proceeds must be repatriated to South Africa in full. And lastly, the offshore property effectively remains a South African asset situated offshore." 

There may also be other benefits and incentives with regards to investing in property in the SADC regions, which vary from country to country. "For example, the Mauritian government has introduced the Integrated Resort Scheme, whereby a non-resident purchaser of a villa worth more than US$500 000 qualifies for permanent resident status in Mauritius. This exempts the purchaser form work or residence permits, which is invaluable for any individual trying to do business in Mauritius. The permanent resident status will also apply to the investor's spouse and children under the age of 18." 

Ideally, a portfolio should incorporate properties of different types and in different locales. And while an international property purchase needs to be more carefully investigated and considered than a local one due to differing laws and financial/tax implications, there are numerous benefits if investments are undertaken wisely.

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