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Cross-border financial planning

A multitude of aspects needs to be considered – preferably well ahead of time.

For many South Africans, their wealth is no longer a purely local matter. Whether they are investing offshore, working out of the country, or looking to emigrate, their finances are crossing borders.

“South Africans are becoming quite global,” says Mike Abbott, director of Sable Wealth. “People are living and working in a place where they might not retire, or living and working in one country and have assets elsewhere.”

This requires them to think a lot more carefully about their financial planning. Often this is led by considerations about tax.

“Where you have someone living and working in two or more different jurisdictions, with money moving between them, or you have someone looking to move to another country, tax residency becomes an issue,” says Abbott. “People need to know what their tax position is in these different jurisdictions.”

A large part of cross-border financial planning is therefore understanding tax residency rules and how tax treaties treat different types of assets and income flows.

“A lot of South African investors are coming to us having explored getting an alternative passport, and now they have to grapple with the financial decisions,” Abbott explains. “They are going to change their tax residency, or apply for financial emigration, and they also might be leaving behind some captured assets.”

For example, you cannot take the capital out of a living annuity in South Africa when you emigrate. You may only opt to have the income paid in another country.

“So you have to consider how you optimise the underlying investment portfolio for someone who is now spending euros, pounds or dollars,” Abbott explains.

Emigrating

For those planning to emigrate, the most important things to consider are whether to sell assets before or after they leave. That will depend largely on how the two countries treat capital gains.

If you already have offshore assets, it’s also important to decide whether you should keep those in a separate jurisdiction, or take them to your destination country.

“The financial system in a place like Portugal is not sufficiently developed to give the choice and solutions many people need, for example,” says Abbott. “Australia is very Australia-centric in its investment solution-set, and it’s a mining country with an index very weighted towards commodities. So you might want more diversification. All of those sorts of issues need to be thought through before one just repatriates money.”

Certain countries also provide tax incentives to wealthy immigrants to encourage them to move. The UK and New Zealand, for example, waive taxes on certain initial income flows.

“Making use of those benefits is quite key,” Abbott says. “You can structure things and save enormous amounts of tax over time if you are aware of how these tax reliefs work.”

Working abroad

For South Africans who are earning international incomes, cross-border financial planning is also essential. They should also pay attention to where they are likely to retire.

“South Africans working in Singapore or Dubai, for example, are not going to retire there because they can’t get permanent residency,” says Abbott. “They are always thinking of a next move, and their investment solutions need to be flexible enough to allow for that.”

This is particularly relevant when it comes to the fixed income portion of an investment portfolio. Generally, these might be thought of as ‘safe’ investments in cash and bonds, but if concentrated in a specific currency, they might be posing a currency risk the investor isn’t aware of.

“If you are sitting in Dubai, for instance, and have a portfolio in US dollars, 40% of that might be in dollar fixed income,” says Abbott. “But if your plan B ends up being the UK and there is a big move in the dollar-pound exchange rate, you can take a big loss on what you thought was the ‘safe’ portion of your portfolio. In the investment world we call this liability matching.”

Foreign interests

Even if you aren’t working abroad or have any intention to move, it’s still important to understand cross-border issues if you are exposed in some way. For example, offshore portfolios or shares in places like the US and UK can be heavily impacted by estate duties.

“If you have a portfolio of UK or US securities, you’ve created a situs issue,” Abbott explains. “Those shares or debt instruments or ETFs [exchange-traded funds] are subject to estate duty in the country in which they are listed. The UK estate duty is 40% and it’s similar in the US although the tax free limits are different.”

There are structures that can mitigate this, but investors need to understand which would be most suitable for their needs.

There are also special circumstances under which international tax issues are a consideration even if you’ve never earned any money outside of South Africa and have no offshore assets. If you are a US passport or green card holder, or if you are connected to someone who is through a trust structure, you probably need to file a US tax return. The penalties can be quite severe if you don’t.

“A lot of the time, clients are not aware of these kinds of cross-border considerations,” says Abbott. “They haven’t realised how many different issues are involved. What seems like a simple issue of optimising their tax, suddenly becomes a much more complicated story with a penalty for non-compliance.”

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