Picture: 123RF/ALLAN SWART
Picture: 123RF/ALLAN SWART

Investing offshore is an essential ingredient in any wealthy individual’s overall portfolio — in tumultuous times it is crucial to have a diversified investment portfolio to hedge against risk.

However, for South Africans an offshore strategy can be fraught with potential complications, not least of which are currency volatility and tax hurdles, and choosing the most appropriate structure for a portfolio. It’s imperative to obtain expert advice and do it right from the outset.

Investing offshore has been a hot topic for South Africans for many reasons — to protect wealth from domestic political or economic risk, to gain access to markets and opportunities unavailable locally, or to diversify across multiple geographic locations and currencies.

There are different ways of accessing the global market. The simplest way is to invest in rand-denominated options such as dual-listed or rand hedge companies on the JSE that earn most or all of their revenue from countries outside SA, or local feeder funds providing access to offshore versions of these funds. As with rand-denominated options tax will always be paid on the rand unit price, asset price appreciation and currency depreciation could affect any potential capital gains tax (CGT).

Many South Africans prefer to invest directly offshore by owning hard currency assets. In this case, CGT will be paid only on the hard currency asset price movement (the rand will have no tax impact on investments).

If you’re not restricted by the Reserve Bank or SA Revenue Service from holding direct offshore assets, offshore allowances (a R10m foreign investment allowance and a R1m single discretionary allowance per year) can be used to transfer after-tax funds abroad. Alternatively, investors who lack the required regulatory approval or who wish to invest more than their annual allowances can make use of the asset swap capacity of a financial services provider.

Investors who are taking the direct route should obtain expert advice before deciding to ship out some of their assets, to ensure they don’t get tripped up by the complexities that often accompany global investments. These could include complications regarding estate duty or inheritance tax (both local and foreign), donations tax, local legislation and restrictions on investing offshore, and the overall effect of currency fluctuations.

Professional advice is crucial to ensure all the factors that could impact the eventual investment returns as well as the intergenerational transfer of wealth are considered. Key factors to consider include:

  • The most appropriate structure: The most common ways of structuring a global investment strategy are investing directly in your own name, integrating assets into a life insurance policy (often referred to as a “wrapper”), or lending money to an offshore trust to make investments. It’s crucial to select the most appropriate structure for your needs. Owning the right asset but through the wrong vehicle might have a dire impact on the overall investment portfolio.
  • Set-up and administration of offshore trusts and company structures: Offshore trusts and company structures remain a popular option for asset protection, tax relief and estate planning purposes. However, setting up and managing these structures can be costly and complex. Be sure to work with a team of experts who can deliver a solution that will stand you in good stead for generations.
  • Global life insurance solutions: Investing through an insurance “wrapper” offers flexible investment options and some tax efficiencies, with the added benefit that your estate won’t have to pay executors’ fees. The pros and cons should be weighed care taken to prevent being tied up in a costly solution should your circumstances change in future.
  • A joint tenancy arrangement: In certain instances it might be a cost-effective solution to invest directly in your own name with a joint tenancy arrangement. However, given the potential complexities, it may be a less flexible option.
  • Local and offshore tax advice and structuring: Tax structuring is a key element of any affluent investor’s wealth strategy and plan. Factors to consider include local and offshore taxes, as well as Reserve Bank regulations.
  • Global estate planning: To ensure the orderly transfer of assets to the next generation all aspects of estate planning and winding up of estates should be considered, including local and offshore inheritance taxes; drafting and reviewing of local and offshore wills; safekeeping of deeds of title, and original trust documents and share certificates; executorships; and power of attorney to administer offshore estates.

• Jeffrey is relationship manager at Sanlam Private Wealth.

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