Key considerations for tax residency when moving to South Africa

It’s important to understand your tax residency status when moving between countries.  How long you're going to be spending in each jurisdiction, will, in most instances, determine where your tax residency is going to reside. If you’re a tax resident in the UK, you should be reporting your income and gains in the UK. The same applies if you’re a tax resident in South Africa, you should be reporting your income and gains in South Africa.

There are exceptions to reporting certain income, such as rental income, which you may need to report in both jurisdictions, depending on the properties you own. Understanding what those requirements are means that you get it right from the beginning and you don't end up in a situation where you have to backdate returns and deal with tax authorities, late filing penalties, and fines. 

Double tax agreements between the UK and South Africa

Double tax agreements have been put in place to determine which country gets the taxing rights to any income dividends, or rental income gains. It ensures that you only pay tax in the country where the taxes are due, and you are not going to get taxed in both jurisdictions.

An example is rental income. If you move back to South Africa but leave a property in the UK, you would still need to report that rental income in the UK, even though you are a tax resident in South Africa. However, any tax you end up paying in the UK on that rental income, you would then get a credit against any taxes that would be due in South Africa. This protects the individual from paying tax in both jurisdictions and therefore twice. 

Evaluate your properties before returning to South Africa 

People think they need to sell their UK properties before returning to South Africa, but this is very much dependent on each person’s circumstances. Factors to consider are: how the property is currently set up with regards to mortgages, the loan to value, where it's based, the type of property it is, and the expected rental yield. You also need to consider the owner’s long-term intentions for the property.  

From a financial planning point of view, the one question to ask is, “What is the financial cost potential of holding on to that property?” In the UK, mortgage rates have increased significantly over the last couple of years. 

You may find that with the interest rates you're paying, the rental income you're going to get from that property is going to be insufficient to pay, not just the mortgage itself, but potentially agents' fees and rental income tax that you've generated on that property.

There have been changes in the UK from HMRC as to how you can offset any costs against your rental, and now you can no longer offset the mortgage interest. This means you're always going to generate a taxable rental income on that property, and if you overlay that with a repayment mortgage, what you'll often find is that the property will be cash flow negative.

If you're moving back to South Africa, and if your income structure is going to change to Rands, you might not want to have the financial commitment of possibly having to top up your UK  mortgage each month.

Offshore pensions and investments

One of the benefits of the UK is that it is a very low-cost jurisdiction when it comes to investing and has quite a wide range of funds available to the investors. More often than not, it is better to keep the pension onshore. For expats returning to South Africa, there isn't an option to transfer your pension back home, because you can only transfer your pension to a jurisdiction that has the same rules and regulations as the UK does on their pensions. This is called a Qualified Recognised Overseas Pension Scheme, or QROPS for short. 

If expats are considering returning to South Africa, they should review their pension schemes to see whether they are flexible enough. If you have been an employee, a company scheme usually gets offered to you, and a lot of UK schemes can be very basic.  What you want to make sure of when you leave, is that you can future-proof your pension, so that when you leave your employment, you can review your pension, and that there is a suitable range of pension schemes available in which you can choose to invest.

Avoiding common mistakes

Most mistakes come down to the reporting requirements when people leave the UK and move back to South Africa. People aren't aware of how each jurisdiction will tax certain investments differently.

A good example is the ISA wrapper in the UK. Many expats, while living in the UK, will build up significant stocks and shares, “ISAs”. These are tax efficient in the UK with tax-free gains and no reporting requirements, but in South Africa, Sars doesn't recognise the ISA wrapper. They (Sars) treat it the same way as a general investment account, and they want to know what sort of income and what sort of gains have been accrued in that investment each year. It's difficult to get that information because you can't simply pull a tax report in the UK, as it's a tax-free wrapper, and that's going to require a lot of manual underwriting that they need to look at.

Many expats who leave consider these issues too late. They focus on the move and forget to consider their investments. Once they have settled back in South Africa, it’s often too late to adjust their investments so it’s best to get advice before you go. 

* Henning is a wealth and mortgage adviser at Sable International.

PERSONAL FINANCE