Nick Jeffrey, Relationship Manager at Sanlam Private Wealth
Investing offshore is an essential ingredient in any high net worth individual’s overall portfolio – in tumultuous times, it’s crucial to have a diversified
investment portfolio to hedge against risk.
For South Africans, an offshore strategy can be fraught with potential complications, however – not least of which is currency volatility and tax hurdles, and choosing the most appropriate structure for your portfolio. It’s imperative to obtain expert advice and ‘do it right from the outset. Here’s what you need to know before going global. Investing offshore has always been a hot topic for South Africans, for a number of 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 the majority or all of their revenue from countries outside South Africa, or local feeder funds providing access to offshore versions of these funds. It’s important to note that with rand-denominated options, tax will always be paid on the rand unit price, which means that both asset price appreciation and currency depreciation could impact any potential capital gains tax (CGT). Many South Africans prefer to invest directly offshore by owning hard currency assets, however.
In this case, you’ll pay CGT only on the hard currency asset price movement (the rand will have no tax impact on your investments). If you’re not restricted by the SA Reserve Bank or SA Revenue Service from holding direct offshore assets, you can use your offshore allowances (a R10 million foreign investment allowance and a R1 million single discretionary allowance per year) to transfer your after-tax funds abroad. Alternatively, if you don’t have the required regulatory approval or you wish to invest more than your annual allowances, you can make use of the asset swap capacity of a financial services provider such as Sanlam Private Wealth.
If you’re going the direct route, it’s essential to obtain expert advice before you decide to ship out some of your assets, to ensure you don’t get tripped up by the
complexities that often accompany global investments. These could include complications around 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 you consider all the factors that could impact your eventual investment returns as well as the intergenerational transfer of your wealth.
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 your overall investment portfolio.
Setup 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 to come.
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. It’s important, however, to weigh up the pros and cons and make sure that you don’t get tied up in a costly solution should your circumstances change in the 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 high net worth investor’s wealth strategy and plan. Factors to take into
account include local and offshore taxes, and SA Reserve Bank regulations, for example.
Global estate planning: To ensure the orderly transfer of your assets to the next generation, it’s important to consider all aspects of estate planning and winding up of estates, 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
- Power of attorney to administer offshore estates.