Although only a small percentage of properties in South Africa is owned by foreign nationals, it is important for agents who regularly deal with foreign buyers and sellers to be familiar with the regulatory, legal, financial and tax implications of these transactions.
Foreign buyers make up roughly two to three percent of the total number of property sales each year and tend to be focused in certain areas. These include coastal regions popular for holiday homes and the major metros where the trend is for business people to acquire lock-up-and-go homes for use whenever they are in the country.
According to Ulrik Strandvik, a director at Gunston Strandvik Attorneys, there are no prohibitions on foreign nationals purchasing and owning land in South Africa at present. However, there is currently a controversial bill tabled in Parliament - the Agricultural Land Holdings Bill – which, if passed into law, will prohibit foreigners from owning agricultural land in the country. This legislation will not apply retrospectively, so it will not affect existing foreign owners of farmland in South Africa.
Financing the property
A foreign buyer may be able to obtain a loan of up to 50% of the purchase price from a local South African Bank, subject to certain restrictions. Such a loan will be secured by the registration of a mortgage loan against the property.
The current exchange control regulations state that foreigners may only borrow as much as they bring into the country. For example, if the purchase price is R20 million, they may be able to borrow up to R10 million and the balance will need to paid into South Africa from a foreign source.
Once the offer to purchase has been accepted by the seller, the buyer will be required to pay the deposit into the conveyancing attorney’s trust account or the estate agency’s trust account, and make arrangements for payment of the balance of the purchase price. For cash purchases the seller’s conveyancer will need a guarantee from a recognised bank, but sellers don’t usually accept guarantees from foreign banks. The standard practice is therefore to pay the funds to the conveyancer, for placement in the trust account, pending registration of the transfer. Other options for securing the balance of the purchase price may be available, and a conveyancing attorney should be able to advise.
Strandvik says there are no restrictions on funds coming into South Africa from a foreign source, but the amounts and purpose of the funds need to be reported to the Financial Surveillance Department, which administers exchange control on behalf of the SA Reserve Bank. This will be done automatically by the local South African bank to which the amount has been paid. The buyer will need to advise the bank of the purpose for which the funds are being transferred - purchase of immovable property. To make payment the foreign bank will require the local bank account details including the Swift Code, which is required for all foreign inward transfers.
Money laundering regulations
The estate agent and conveyancing attorney will need to satisfy the requirements of the money laundering regulations. This generally takes the form of verifying the buyers’ identities and source of funds required to undertake the purchase.
The transfer process
Once the offer to purchase is accepted by the seller, the conveyancer is instructed to attend to the registration of the transfer of the property to the new owner.
Buyers and sellers can sign agreement of sale documents while out of South Africa. However, there are more stringent requirements when signing the property registration documents for lodgement at the Deeds Office. This will involve signing in person at the SA Embassy in the foreigners’ country of residence or in the presence of a notary public, which involves additional expense.
Transferring proceeds of a sale out of SA
One of the attractions for foreign nationals investing in South Africa is that all funds which are transferred by a foreigner into South Africa, together with any capital growth or interest, can be repatriated in full on sale of the property. That is, the full proceeds of the sale can be transferred back to a foreign jurisdiction, with the following conditions:
Proof must be provided that the funds were introduced from a foreign source. It is therefore important for foreign investors to keep all bank documents and receipts relating to the inward transfer of funds into South Africa.
They must be able to prove that they are foreign nationals, by means of a passport, for example.
They must be able to prove that they are the owners of the property and that they have sold the property. For this they will be required to provide copies of the title deed and agreement of sale.
They must have paid or made provision for the payment of capital gains tax.
Strandvik says estate agents should advise foreign buyers that if they have formed a SA company or trust into which to take transfer, any funds paid from an offshore source should be in the form of a loan from the foreigner to the company or trust. This type of loan must be approved by the South African Reserve Bank before being transferred to SA. Once the loan is approved, the full loan amount and interest thereon can be repatriated out of SA on sale of the property. “We strongly urge you to seek the appropriate legal and exchange control advice in respect of foreign loans,” says Strandvik.
Tax implications
Foreigners are generally not subject to capital gains withholding tax in South Africa, with the exception of the sale of immoveable property worth over R2 million. The gain is calculated as the difference between the base cost - the original purchase price plus any improvements to the property, excepting repairs and maintenance - and the costs of selling, such as estate agent’s commission.
There is a CGT withholding tax obligation on the buyer who buys immoveable property worth over R2 million from a foreign national. The withholding tax rates are 7.5% for non-resident individuals, 10% for foreign companies and 15% for foreign trusts, which is calculated on the full purchase price. Non-resident sellers can apply for a directive from SARS to pay an amount less than the withholding tax amount should the actual CGT be less than the withholding amount.
Although the responsibility to withhold the tax lies with the buyer, Strandvik says this whole process - including the retention of the withholding tax and/or application for a tax directive from SARS - is usually handled by the conveyancer who is attending to the transfer. Investment property
For foreign nationals who buy property as rental investments their rental profits will be subject to income tax in South Africa. The profit will be the rental income less relevant expenses relating to the property. Tax on profits will depend on whether the property is owned by an individual, a company or a trust. The tax rate for individuals is based on the individual’s marginal rate of tax which is calculated according to the bands of income specified by SARS. The corporate rate is 28% and trusts are taxed at 40%.
There are ways to structure tax more efficiently, and estate agents should refer foreign clients to reliable tax advisers. Strandvik says that rental profits may be transferred out of South Africa, provided that the owners can show that the property was purchased with foreign funds.