During the hard part of the lockdown, many investment companies provided lots of value-added webinars to advisors while everyone was waiting it out at home. Some of these webinars provided excellent content and some didn’t, but Ninety One (previously Investec Asset Management) through a Masterclass Series run by Albert Coetzee and Marc Lindley of Ninety One was one of the best.
One of the most interesting and enlightening sessions was called the Offshore Cash Conundrum. As most South African investors know, the last five to six years have seen pretty lousy returns coming from SA asset classes. Put this together with the real fear of where our economy is heading and this has led advisors and investors to look for potentially greener pastures in the offshore environment with their non-retirement funds. Knowing where to invest now offshore, unfortunately, is not easy either as various parts of the global developed market seem to be a tad expensive considering what is happening to the underlying economies of these countries.
So, some have chosen to play it safe and just put funds into their offshore bank accounts even though interest rates offshore are ridiculously low. For some who are more risk-averse just getting their funds out of SA regardless of offshore return is enough and makes them feel “safer” in reducing exposure to the rand.
Though the decision to move funds into your offshore bank account once you have obtained tax clearance from Sars might sound like an easy decision and a no-brainer for some, one has to be careful about some of the implications of having funds offshore in less than ideal investment vehicles for SA tax residents.
Offshore policy wrappers like the ones provided by Ninety One and others do offer some real solutions to some of the potential issues with investing offshore. Unfortunately, offshore wrappers do come with an extra administration fee compared to the offshore bank account. There might even be an advisor involved in the advice which might add a bit more, but this might all be worth it when one considers that once you invest offshore, you will need to make sure you understand the estate and tax considerations that might come along with this investment.
Depending on where the bank account is held, offshore probate may apply on the death of the investor. While most investors understand the role of a SA executor, an offshore agent with a similar role might need to be appointed to deal with this offshore bank account. This could delay the winding up the estate and be expensive.
Overseas inheritance tax (situs) may also apply, which, depending on where the account is held, may be as high as 40%. Estate duty in South Africa is payable on worldwide assets so this bank account will be part of the net and unless there is a Double Taxation Agreement (DTA) between the countries, this could result in double estate tax. Even if there is a DTA, there might still need to be a higher charge to cover foreign inheritance tax rates.
The problem of an account being frozen in the estate winding-up process, just at a time when a dependent might need to rely on these funds, can also not be overlooked and is often a cause of huge stress at a very emotional time.
So unless the cash in that offshore bank account is there to meet short-term holiday plans, an offshore bank account that is set up to be a longer-term “parking” facility or an interim measure should perhaps be put in a more appropriate investment vehicle which could give great peace of mind even when taking costs into account.
An offshore wrapper can have the following major benefits:
- Investors don’t have to worry about personal tax reporting. Tax due is paid by the administrator at the applicable rates governed by the Long-Term Insurance Act.
- Most funds in a wrapper will end up being roll-up funds meaning income and dividends are not distributed and rather capitalised, so no income tax, only capital gains tax when and if applicable. This rate of CGT is currently set at 12% for individual investors which might turn out lower than your current personal CGT rate.
- Investors can nominate a beneficiary who will receive the benefits on their death. Probate/executor fees will not be charged.
- Usually, funds from the investment are also immediately available to the beneficiary after the death of the investor. A massive advantage.
It really might be worth looking into these features provided by offshore wrappers. The different companies offering them usually have slight variations so it is important to go through this with an advisor taking a holistic view before making the decision.