How to protect your offshore investments from offshore taxes and estate problems
By Maria Smit
Savvy South African investors have realised that the best investment returns are to be achieved by investing offshore. As with all investments, it has tax implications, and it is imperative to be aware of what they are.
Working with an advisor is important as the requirements differ across territories and it can – as with all investment selections – get technical.
Tax laws and regulations vary significantly between jurisdictions, and what may be permissible or advisable in one country could be illegal or ill-advised elsewhere.
Therefore, thorough research and professional guidance are essential when navigating offshore tax planning and asset protection strategies.
When selecting an appropriate offshore investment product, estate planning is a critical factor to consider.
The offshore assets in an investor’s estate could be liable to a mix of the following taxes and charges upon their passing:
- Local and foreign estate tax
- Local capital gains tax
- Local and foreign executor’s fees
- Foreign stamp duty
The type of investment vehicle and its jurisdiction will determine which of these taxes and fees are applicable. Flexibility and creditor protection are other elements to consider in addition to these possible liabilities.
Foreign Estate Tax (also known as Situs Tax)
A government may impose a situs tax, or other taxes, on financial assets according to their location.
When an owner passes away, most assets, including equities, real estate, and bank accounts, are covered by this tax.
An example of this inheritance tax is UK inheritance tax. When a person who is UK domiciled dies, inheritance tax is payable at 40% of the value of assets in their estate – however, the first GBP 325,000 is exempt.
For the US it is also up to 40%, but the first USD 60,000 is exempt.
You can protect yourself against these taxes by placing your money in endowment funds or UCITS (Undertakings for Collective Investment in Transferable Securities) investment funds to minimize their tax liability.
Distributing the funds among other nations lowers the total tax. For instance, policyholders of offshore endowments pay an effective capital gains tax rate of 12%, but individuals in South Africa pay 18%.
Grant of Probate
A lot of platforms that South Africans use to invest offshore do it on the Island of Guernsey or Jersey. These Islands require Grant of Probate.
A Grant of Probate is the equivalent of a Letter of Executorship in South Africa.
The process of demonstrating a will’s validity is referred to as “probate,” which basically means “proof.”
A grant of probate is the formal acknowledgement by the Court that a will is enforceable, and that the person or people named as executors under the will have the authority to manage the estate.
If you have assets offshore, you might need an offshore will.
One way to protect your funds from situs tax and Grant of Probate, while also ensuring your family does not wait years before the South African Master’s office finalises your estate, is to invest in an offshore endowment.
Some important features of an offshore endowment
An offshore endowment portfolio can hold multiple currencies and include shares, ETFs, unit trusts, or a combination of these assets.
The investment provides advantageous income tax benefits, with a fixed rate of 30% for fixed income and an effective capital gains tax rate of 12%.
As most offshore funds are invested in equities, most people struggle with CGT.
Taxes are administered and incurred within the endowment structure, so investors do not need to report any personal tax to SARS.
Your personal income tax exemptions are not used for taxes within this investment.
No Executor fees are charged if beneficiaries have been nominated, and estate duty applies only if the investor is not survived by a spouse.
Grant of Probate is not required.
When contract owners die, CGT is exempted if the contract is transferred to the nominated beneficiaries, and the base cost is transferred to them.
Most importantly, investment provides protection against Situs tax.
During the 5-year “restricted period,” investors can withdraw up to 105% of the original capital invested through multiple withdrawals if needed.
Protecting offshore funds against taxation requires careful consideration and adherence to legal and regulatory frameworks.
Speak to us to assist you with all your offshore investment needs.
For more information on Brenthurst Wealth click here.
Maria Smit, CFP®, is a financial advisor at Brenthurst Wealth Pretoria.
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