When it comes to building any resilient portfolio – I believe true success lies in diversifying optimally, and this way protecting yourself against every aspect of risk – but also ensuring you are benefiting from all opportunities.
Including offshore exposure in your investment diversifies risk across different economies, different regions, sectors, securities and fund managers. Locally, we have approximately 1 300 funds registered with the Financial Sector Conduct Authority (FSCA). Globally, there is more than 200 000. Looking at stocks, there are roughly 350 listed on the JSE’s main board, compared to 60 000 globally.
Just as asset classes behave differently in different market cycles, the same diversification of risk applies to different economies and regions – when one is under pressure, another might be doing well.
1. What do you need to consider when investing offshore?
Offshore investing can be done in more than one way – indirectly or directly (physically moving your money out of the country). Your specific needs in your portfolio need to be determined as direct investing is not necessarily appropriate for your personal goals. Have a look at the holistic approach of your portfolio, your personal goals, your asset allocation in your entire portfolio, as well as affordability and liquidity requirements.
2. What are the regulations you need to be aware of when investing offshore?
When it comes to local, rand-denominated products – some products are regulated in terms of asset allocation. In South Africa – pre-retirement products are governed by Regulation 28 of the Pension Funds Act. These products include retirement annuities, preservation funds, pension or provident funds. Regulation 28 limits offshore exposure to 30% of your portfolio.
As for any other offshore investments – the only other regulation that will apply are relevant to direct offshore investments – this applies when you are physically moving funds out of the country. Here we have offshore allowances. Every individual is allowed to move R1 million on an annual basis, without any Sars tax clearance required, and we can move an additional R10 million annually – subject to a Sars tax clearance.
3. What are the documents you need before embarking on this?
Should you be investing directly offshore, and anything above R1 million per annum – a Sars tax clearance will be required. Additional to this there will be the standard investment documents applicable – including an application form, compliance documents, a record of advice, an investment proposal, as well as Fica requirements – depending on which entity (natural person vs a company or a trust – the Fica requirements will differ).
4. What planning is needed to avoid unwanted inheritance tax and estate duty implications when investing offshore?
When it comes to building, and optimising a resilient portfolio, the structure/vehicle through which you invest and the planning that comes with it, are equally important to the investment portfolio itself. Ensure that you are taking the possible tax implications, estate planning as well as continuity planning into account from the start. The reason why we are taking our funds offshore is generally to protect it – therefore offshore investments need to be done properly.
The first point that needs to be understood, is what happens at the time of death, as the treatment of the investment upon the investor’s death may be different to SA and may vary depending on where the funds are domiciled.
Every country tries to maximise its tax revenue. For this reason, the place (situs) where an asset resides for tax purposes becomes extremely important. This becomes the link (nexus) that a country uses to tax an asset as income, capital gains or as a wealth tax. As each country uses a different nexus, it is quite possible that more than one country can tax the same asset. When investing in offshore assets, it is therefore always important to take the situs rules of the relevant countries into consideration.
At the time of death – there are estate taxes that need to be provided for. For example, considering the UK and the US, the estate taxes in:
- the UK is called inheritance tax;
- the US, estate taxes; and
- in South Africa, estate duties.
In the UK the first £325 000 of an estate is exempt from taxes, but thereafter it is taxed at 40%. As the estate is taxed on the same assets in South Africa, it will receive a rebate of 20% against local estate duties. Similarly to South Africa, everything bequeathed to your spouse is exempt.
In the US only the first $60 000 of an estate is exempt from taxes, with the residue taxed on a sliding scale up to 40%. The double taxation agreement with the US exempts shares taxed in the US from estate duties in South Africa. There is no relief for spousal bequests.
Determining the tax implication in the different jurisdictions will vary depending on which type of offshore asset you want to invest in. If we look at offshore shares specifically, where the company (of the share you are buying) is registered will determine the situs taxes to be paid. This applies to UK and US rules.
This is where the correct structure/vehicle comes in – and why we would advise in certain scenarios making use of an offshore endowment or sinking fund policy structure.