Over the last few years it has become far simpler for South Africans to invest offshore. Not only have exchange controls been loosened, but the options available to local residents have increased significantly.
Many local financial firms now have offshore offerings, and a number of companies even specialise in investing money for clients outside of South Africa.
There are four common ways of investing offshore. They are:
Set up an international brokerage account which is either managed personally or by a professional portfolio manager;
Invest in a foreign currency unit trust, usually through a local platform;
Invest in shares or funds through an insurance wrapper, such as the Glacier Global Life Plan;
Set up an offshore trust to which you lend money to make investments.
Read: How to invest offshore
Whichever route you chose to follow, however, there are three things you must keep in mind:
1. You don’t need an offshore bank account
It has become very hard for South Africans to open transactional bank accounts offshore. If you haven’t lived and worked overseas, having a personal account outside of the country is quite rare.
“Trying to open an offshore account for an individual is quite tricky, and maintaining an offshore account is even harder because you will be hit with bank charges on a monthly basis,” says Nick Jeffrey, a relationship manager at Sanlam Private Wealth.
Fortunately, it is not necessary to have an offshore account in order to invest outside of the country. It is possible to transfer the money directly from a South African bank account.
“Opening an international brokerage account is pretty much the same process as you would follow for a local account,” says David Nathanson, a portfolio manager at Bellwood Capital. “You sign a mandate, brokerage application form, complete your Fica documents, and transfer the funds.”
When you will need an offshore account, however, is if you want to withdraw your money but don’t want to bring it back to South Africa. Then you will have to address this challenge.
2. You don’t need millions
Taking money offshore used to be reserved for the very wealthy. However, the range of options now available to South African investors have made investing internationally far more accessible.
Most tellingly, EasyEquities allows investors to access a selection of US-listed shares and exchange-traded funds with no minimum investment amount through its USD accounts. What investors do need to be aware of, however, is that there is a cost involved in moving money offshore if you do it through a bank. With charges coming to around R200 per transaction, you need to have a a decent amount of money to make it worthwhile. It doesn’t make sense to invest R500 if 40% of that will be lost to bank charges.
Other online brokers do have minimum amounts, but these are not necessarily that onerous. PSG, for example, accepts minimum initial investments of £5 000 (R84 000). Interactive Brokers requires a minimum amount of $10 000 (R126 000).
Investec offers structured products held offshore that generally require minimum investments of R50 000. Most foreign currency unit trusts registered in South Africa and accessible through local platforms tend to require minimums of $10 000 (R126 000) and up.
If you want someone to manage a bespoke portfolio for you, however, that may need bigger amounts.
“If you are looking for a managed account, we take clients with amounts of $100 000 (R1.26 million) or more,” says Nathanson.
3. You do need good advice
Investing offshore may have become a lot easier, but that doesn’t mean it’s less complex. Given the options available to South African investors, it’s important to understand all of the advantages and disadvantages.
“The most important thing you can do is get proper advice,” says Jeffrey. “Go to your wealth manager and if they don’t know the offshore space, ask them to recommend someone who does. If you are trying to do it yourself or with an advisor who isn’t that up to speed, chances are that you might end up in something that you would pay more tax on or cost you more than you would expect.”
Taxes are a particularly big issue in this respect. You need to know where and how you will be paying tax, especially when it comes to capital gains and what your estate may be liable for on your death.
The US and UK both tax situs assets on the death of the investor. Situs refers to where the assets are based, rather than who owns them.
In the UK, the threshold for paying duties is £325 000 per person. The US threshold is $60 000 per person, but it works on a sliding scale starting at 18%. Investors do however get a credit in South Africa for estate duty paid overseas, so you don’t get taxed twice.
“In practice, we’ve found the impact of situs to be minimal for most of our investors, and many of the structures people use to avoid it end up costing them more than the tax would,” Nathanson says. “Obviously this needs to be assessed on a case-by-case basis.”