The wisdom of moving a portion of your portfolio offshore has been demonstrated time and again. Speaking at a recent Sanlam Private Wealth webinar, CEO Carl Roothman pointed out that more than 50% of the R165 billion under management at Sanlam Private Wealth is invested offshore, and that this figure will likely grow to 60% in the coming years.
According to Reginald Labuschagne, head of product and strategy, the rand is a powerful emotional gauge for the country, and most South Africans tend to react when they see a deterioration in the level of the rand by seeking to shift as much of their funds offshore as possible. This is not a sound solution.
“A proper global strategy has to be put in place that straddles South Africa and international markets,” said Labuschagne.
Nick Jeffrey, relationship manager at Sanlam Private Wealth, noted that there remains strong pressure to shift funds offshore, a result of SA’s location at the tip of Africa, coupled with a relatively small economy and a legacy of being prevented from investing abroad until relatively recent times.
“Investing offshore allows you to protect your wealth from economic and political risk. It allows you to take advantage of investment opportunities and currencies that we don’t have in SA. It means a family can grow their wealth in a way that is not limited to the SA economy,” said Jeffrey.
Labuschagne outlined the most common ways of building an offshore exposure:
- Invest in JSE-listed companies that have international exposure;
- Invest in SA-based feeder funds that give you offshore exposure; and
- Direct investment in offshore assets using your SA foreign investment allowances. These can also be housed in either a ‘wrapper’ or an offshore trust.
To achieve this, you can make use of your R1 million-a-year special discretionary allowance (SDA) and the R10 million-a-year foreign investment allowance.
“If you run out of these allocations, you can use unused allocations of institutions such as Sanlam Private Wealth,” said Labuschagne.
Sanlam Private Wealth also makes available equity-backed finance facilities to allow clients to take up investment opportunities without having to sell their existing portfolios.
Structuring your offshore assets to create intergenerational wealth
South Africans are taxed on their worldwide income, and this means great care must go into structuring offshore assets from the get-go. For this you need professional advice.
Making the wrong structuring decisions means you are potentially exposing yourself to tax in SA and other jurisdictions.
Take inheritance tax, for example, which in SA can be between 20% and 25%, depending on the asset amount. If you have a direct equity portfolio comprising mainly US equities, for example, you risk exposing yourself to inheritance tax in the US (or elsewhere) as well as SA.
SA has double taxation treaties with many of the most common jurisdictions, which is an important factor in any offshore structuring decisions.
For many, building a direct equity portfolio in your own name is the simplest and cheapest way to go. But here, too, there are pitfalls.
Jeffrey told the story of a Sanlam Private Wealth client, a family that had built up a direct equity portfolio offshore that had become subject to capital gains tax after many years of good growth. “The family realised that this problem will continue into the future. There were four family members, so if one of them passed away, the survivors would be hit with an inheritance tax of potentially 40%.
“That was an expensive mistake, but it would have become more expensive as time progressed. In the end they decided to sell the portfolio, pay capital gains tax and start again by shipping funds abroad through an offshore trust, but this time doing it in a way that would not create huge problems later.”
What is probate?
Probate is the process of recognising that the executor has a will in a foreign jurisdiction. When the deceased person has assets in different countries, there are legal hurdles in several jurisdictions that can be both costly and time consuming when it comes to wrapping up the estate.
There are certain fund structures that are able to circumvent these complications because of the structuring embedded into the fund itself, said Jeffrey.
Giving blanket advice when it comes to offshore investment is hazardous because of the number of assumptions that have to be made. No two clients have the same circumstances or goals. Investing in offshore property, for example, has become popular with South Africans in recent years, but this is a highly specialised field requiring expert advice.
For instance, if you wanted to buy a property in Mauritius, you would be subject to local laws that ignore the stipulations of your will. However, there are ways to mitigate these risks, such as through properly structured offshore trusts.
“If you are looking to buy a residential property in the UK, it’s probably better to buy in your own name rather than a trust,” said Jeffrey. “One of the tools available to you is a joint tenancy account, which means in the case of one spouse passing away, the surviving spouse can assume full control of the account without incurring inheritance or other taxes.”
A wrapper fund is a combination of collective investment schemes (unit trusts). The portfolio is wrapped or managed according to a specific mandate.
“What I like about a wrapper is that it is quite a flexible vehicle, and you get certain tax efficiencies. You can bring the income tax rate down from 45% to 30%, and capital gains tax down from 18% to 12%, and you can avoid executors’ fees of about 3.5%,” added Jeffrey. “Wrappers can be used to sort out probate and inheritance tax issues in other countries and give you certain other advantages.”
Another popular structuring vehicle is called a dry or dormant trust – once estate duty is paid in SA, the funds are moved offshore.
Wrappers have many great uses, but there are limitations. In some situations, offshore trusts are better suited for offshore structuring.
“Trusts are looked at closely by authorities around the world and may not be as tax effective as they were in the past, but they are still highly beneficial for creating intergenerational wealth. There are issues around where the money is now and how you get it into the trust. This can be costly if done incorrectly. One of the most common ways is to lend money into the trust, for which you would have to pay tax on the interest earned on the loan. But with the right set-up, you have set yourself up for growth in the wealth accumulated in that trust,” said Jeffrey.
$1 million is a good starting point for an offshore trust
At about $1 million (around R14.58 million at the current rate of exchange) you should start looking at a trust, possibly earlier, added Jeffrey. If you are setting up a business offshore, that can also be done through a trust.
Whether to shift funds offshore in your own name, through a wrapper or an offshore trust, will depend on myriad factors, such as your age, future plans, who the beneficiaries are and your investment goals – and, just as importantly, how those investment goals may change over time. All of these factors must be considered in the initial offshore structuring.
Getting it wrong in the beginning can cost millions of rands later on – particularly when the portfolio has grown in size and complexity.
If you’d like further information, please contact Nick Jeffrey via email or on 021 950 2300.
You can watch the webinar recording here.
Brought to you by Sanlam Private Wealth.
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