Buying Property Offshore? 5 things South Africans must know

• Buying the overseas property may be the easy part; moving your money offshore compliantly and cost-effectively requires careful planning.
• Tax clearance, exchange-control requirements and currency movements can create costly delays if buyers leave the financial process until settlement.
• Exchange-rate spreads and transfer charges can materially change the true rand cost of an international property investment.

Finding the property is often the easy part

‍Buying property overseas can represent an important step in building a diversified investment portfolio, creating a second home or establishing a longer-term offshore asset base.

For South Africans, however, finding an apartment in Portugal, an investment property in the UK or a retirement home in the US may turn out to be the relatively straightforward part of the transaction.

Getting the money there can be considerably more complicated.‍

South African buyers need to navigate tax compliance, exchange-control requirements, offshore allowances, foreign exchange movements and transaction costs, often against strict payment deadlines contained in the property transaction.

A buyer may spend months researching locations, yields, property prices and potential investments, only to discover after signing that transferring several million rand offshore cannot necessarily be completed at the push of a button.

Harry Scherzer, CEO of Future Forex, says this makes the movement of capital an important part of the investment decision from the outset. 

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"The buyers who experience the least delays are usually those who began preparing their tax documentation months in advance, rather than waiting until the offer to purchase is signed."

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The lesson for investors is simple: do the financial and regulatory homework at the same time as the property homework.

Here are five issues South Africans should consider before committing to a major offshore property purchase.

Get the paperwork right before you commit

‍Signing an offer to purchase is not the end of the process. For South Africans buying property abroad, it can be the beginning of the financial and regulatory work required to move the purchase capital offshore.

Before committing to the transaction, establish:

• How much capital needs to leave South Africa.
• When each payment is due, including deposits and final settlement.
• What SARS requirements apply to the transaction.
• What SARB exchange-control requirements need to be considered.
• What documentation will be required to prove the source of funds.
• Whether additional approvals could delay the transfer.
• Whether your offshore purchase agreement has strict payment deadlines or penalties.

A buyer who discovers a compliance problem days before settlement could face unnecessary pressure or potentially jeopardise the transaction.

Investor takeaway 1‍

Get the money-transfer roadmap in place before signing, not when the payment deadline arrives.

2. Know which offshore allowance you need

The size of the property purchase determines how the capital-transfer process needs to be structured.

Investors should establish upfront:

• The total rand value of the offshore investment.
• Whether the transaction falls within the applicable Single Discretionary Allowance (SDA).
• Whether the Foreign Investment Allowance (FIA) will be required.
• Whether a SARS Approval International Transfer (AIT) application is necessary.
• Whether the transaction is large enough to require additional regulatory approval.
• How purchase costs, taxes and professional fees affect the total amount being transferred.
• Whether the transaction should be structured across different payments or settlement dates.

Do not calculate the allowance requirement using the property's asking price alone. The total capital requirement is what matters.

Investor takeaway 2‍

Know how much you need to move, which allowance applies and what approvals are required before committing to settlement dates.

3. Treat tax clearance as part of your due diligence‍

Tax compliance should be addressed alongside the property search, financing and legal due diligence, not after the deal has effectively been concluded.

Where an AIT is required, buyers should prepare early for the SARS process.

That includes:

• Checking that tax returns and obligations are up to date.
• Preparing documentation showing the source of the investment funds.
• Having relevant bank statements and financial records available.
• Identifying any information SARS may require regarding assets and liabilities.
• Allowing sufficient time for questions or additional documentation requests.
• Building the approval period into the property's settlement timetable.
• Avoiding the assumption that clearance can always be obtained within a few days.

For an investor, this should be treated in much the same way as finance approval: don't assume it will happen automatically.

Investor takeaway 3‍

Start the tax-compliance process early enough that SARS approval does not become the weak link in your property transaction.

4. Protect yourself against currency movements

A property may have a fixed asking price in euros, pounds or dollars, but its rand price continues changing until the currency is secured and payment made.

That creates a potentially significant investment risk. Consider a €300,000 property:

• At R19.50/€, the property costs about R5.85 million.
• At R20.30/€, it costs approximately R6.09 million.
• That's roughly R240,000 extra.
• The underlying property price has not changed at all.
• Only the exchange rate has moved.

Investors therefore need to consider:

• The exchange rate when the offer is signed.
• The timing of the deposit.
• The date of the final settlement payment.
• Their ability to absorb an adverse currency movement.
• Whether an appropriate currency strategy can provide greater cost certainty.
• The effect currency movements have on the property's actual investment return.

This is particularly important where there is a long gap between signing and settlement.

Investor takeaway 4‍

Don't assess an offshore property's affordability using today's exchange rate and assume that will be your final cost.

5. Calculate the true cost of getting your money there‍

The property's asking price is only one part of the acquisition cost.

South Africans should calculate what the entire transaction will cost in rand, including the cost of converting and transferring their capital.

Look beyond the advertised transfer fee and consider:

• The exchange rate being offered.
• The provider's foreign-exchange spread or margin.
• International transfer charges.
• Potential intermediary banking fees.
• Local banking or receiving charges where applicable.
• Foreign legal, tax and transaction costs.
• The total number of rand required for the correct foreign-currency amount to arrive at its destination.

This becomes particularly important on multimillion-rand transactions. Even a relatively small difference in the effective exchange rate can translate into a substantial amount of money.

Investors should therefore ask one simple question: How many rand will leave my account for the required amount to arrive at the other end?

Investor takeaway 5

‍Compare the total cost of the transaction, not merely the headline transfer fee or advertised exchange rate.

So, where does the journey actually begin?‍

For South Africans buying property abroad, it should begin before the offer is signed.

‍Finding the right property is only half the investment decision. Buyers also need a clear plan covering SARS compliance, exchange-control requirements, offshore allowances, payment deadlines, currency risk and transfer costs.

Harry Scherzer, CEO of Future Forex, puts the emphasis on preparation: buyers who understand the process early are far better positioned to avoid unnecessary delays and last-minute financial surprises.

The bottom line: Know where you want to invest, but know exactly how you're going to get your money there before you commit.

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