At Global & Local, we are continuously researching different products to offer our clients and through the process, we came across offshore endowment type wrappers offered by a certain South African based product provider, and we felt the need to share them with our readers.
There are two types of offshore endowment type wrappers: an endowment and a sinking fund.
An endowment is a linked investment plan for offshore investments, offering flexibility for clients. The investment options include a diverse range of international collective investment schemes (unit trusts) covering all asset classes, as well as individual stocks.
A sinking fund is like a special purpose savings account where funds are saved in the investment with an intention to repay a debt/replace an asset or acquisition in the future. The funds will only be used for the predefined purpose.
What are the benefits of having offshore wrappers?
- The investment can be held in joint names.
- You can nominate a beneficiary for ownership whereby the intention is for the plan to remain invested after the owner passes away and for one or more beneficiaries to receive the proceeds of the policy.
- The service provider will be responsible for any tax calculation, collection or administration based on capital gains tax, income tax and foreign dividend tax. This means that the investor will not have any tax administration to take care of themselves and tax is calculated in the currency you are invested in.
- There will be no executor fees due to the beneficiary nominations.
- Liquidity – certain product providers offer up to 100 withdrawals with no penalties.
- Protection against creditors – once the endowment has been active for three years, creditors will not be able to claim any funds from these investments.
- Making additional investments is straightforward.
- Reporting currency can be US dollar, British pound, euro, Australian dollar and Swiss franc.
- Avoidance of probate and situs.
The only difference in benefits between the endowment and sinking fund is that the sinking fund is not protected from creditors.
Many investors are unaware that their offshore assets could potentially be subjected to adverse tax and estate consequences at death:
- Probate – probate is a process whereby a will is accepted by a court as a legal document. There are certain offshore jurisdictions that cannot be governed through a local will and, as such, foreign will would need to be drafted to deal with the assets. In the instances where a local will is accepted, very often the local estate is delayed while the will is sent offshore. This can cause unnecessary delays to the winding up of the estate as well as add to costs as a lawyer would need to be appointed to assist in the winding up of the foreign assets in the country where the asset is held.
- Situs – assets held in certain foreign jurisdictions, most particularly the United Kingdom and the United States may be subject to inheritance tax under the law of situs. In the US assets over $60 000 tax is up to 40% and in the United Kingdom assets over £325 000 tax is up to 40%.
Taxation on the offshore wrappers:
- Capital gains tax (CGT) is at a rate of 12% for individuals which is applicable on all realised gains from switches, share trading and withdrawals.
- Income tax is a rate of 30% for individuals which is applicable for any income (rental and interest) received.
- Foreign dividend tax is a rate of 20% for individuals which is applicable to the net of tax withheld at source.
All taxation is calculated within the wrapper and there are no reporting obligations for the investors, which is one of the key benefits.
If you are considering an endowment type plan and want to diversify your portfolio across various economies or geographic regions the offshore type wrappers should perhaps be considered. With standard endowment plans, you may only access your funds at maturity (after the five-year term) or may take one withdrawal before maturity. By investing in offshore wrappers, you get to enjoy the benefit of liquidity as you are allowed 100 withdrawals from the endowment type wrapper policies during the restricted period, from this particular South African based product provider (we can disclose who this product provider is at a request from any reader who contacts us).
You are welcome to contact us at Global & Local Investment Advisors to find out more about these offshore endowment wrappers.