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Emigrating to the UK? Beware the tax of SA assets by UK taxman

SOUTH Africans looking to emigrate to the UK face a new reality regarding the taxation of their South African income and gains. South African expats will no longer be able to shield their South African assets from the UK tax authority (HMRC).

Historic amendments have been proposed to overhaul the current UK tax regime with a new system focused on taxing foreign income and gains on a residence basis. Consequently, South Africans who move to the UK will be subject to UK tax on South African income earned and on the gains made on the disposal of their South African assets, including the withdrawal of their South African retirement savings.

Fortunately, transitional measures have been proposed to blunt the initial impact, offering tax-efficient wealth restructuring opportunities for those who do their pre-emigration financial planning.

Understanding the UK’s old non-domicile tax regime

The UK’s non-domicile (non-dom) tax regime dates back to 1799 when it was introduced to exempt colonists from paying tax to the Crown on their colonial investments. A non-dom tax status allows UK tax residents who can site another country as their real domicile to pay taxes only on their UK-sourced income and assets. They can also elect to pay UK tax on their foreign income and gains only if they remit that money to the UK.

Over centuries, this has benefited many South African-born UK tax residents, who sheltered their offshore earnings and assets from UK taxation. However, over the last few years, this tax regime has become increasingly controversial in the UK, raising questions about the fairness of taxation treatment, with foreign-born, wealthy individuals not paying their fair share of taxes towards public services.

The new foreign income and gains tax regime

Under increasing public pressure ahead of the upcoming general election, the Conservative government under Rishi Sunak recently announced the dramatic step of scrapping the non-dom tax regime. From 6 April 2025, all UK residents will now be subject to taxes on all foreign income and capital gains, regardless of their domicile status.

The UK government has, however, established transitional rules to avoid discouraging foreign immigrants from moving to the UK while also seeking to soften the blow for existing non-domiciled residents.

New immigrants will receive a four-year tax holiday on their non-UK income and gains, irrespective of whether the funds are remitted to the UK.

The scrapping of the non-dom status for inheritance tax is still under review. However, the likely direction follows the residence-based regime with the inclusion of worldwide assets in the UK estate of deceased UK tax residents. The opposition Labour Party broadly supports these changes but will likely take a harsher approach to inheritance tax.

How these changes affect South Africans looking to emigrate to the UK

When South Africans emigrate, a surprisingly large number retain significant wealth in South Africa. Studies have shown that over 70% of South African expats, for example, retain their retirement savings (preservation funds and RAs) in South Africa after leaving. Consequently, South Africans thinking of emigrating to the UK urgently need to relook at how they plan to transfer their South African wealth abroad in light of these proposed changes to the UK tax system.

For example, South Africans with retirement annuities must wait three years from the date of formally ceasing to be a South African tax resident with Sars before they can withdraw those funds from South Africa. This gives them a narrow window before the four-year UK tax holiday expires.

Waiting too long could result in the lump-sum withdrawn being fully taxable in the UK at tax rates as high as 45%.

The interplay with South African tax legislation also needs to be considered. The formal tax status of South African expats in South Africa and the double tax agreement must all be taken into account.

With these new rules on their way, careful tax planning is essential for South Africans looking to emigrate to the UK, particularly regarding their decisions on when to withdraw funds from South African pensions and retirement annuities or sell South African assets.

Seek professional tax guidance

South African immigrants in the UK are strongly advised to consult with a qualified tax professional to understand how the UK’s new residence-based tax regime applies to them. By carefully analysing their financial situation and future plans, they can develop a tax strategy that minimises their tax burden and maximises the advantages offered by the transition rules. –

Michael Kransdorff is CEO, and Vanessa Grasslin is senior international tax consultant at the Institute for International Tax and Finance.