The ad­van­tages of en­dow­ments In the in­creased cap­i­tal gains tax en­vi­ron­ment, in­vestors will be sur­prised to dis­cover the ad­van­tages of man­ag­ing a trust’s share port­fo­lio in an en­dow­ment.

Finweek English Edition - - MARKETPLACE -


the re­cent 2016 Bud­get Re­view, and more specif­i­cally the mas­sive in­creases in South African cap­i­tal gains tax (CGT) an­nounced by fi­nance min­is­ter Pravin Gord­han, I com­pared the mind­set of many in­vestors to­wards en­dow­ments to the driver that has been tak­ing the same road to their cho­sen des­ti­na­tion for years, sim­ply be­cause they thought that it has been, and al­ways will be the best route.

I also men­tioned that in­vestors may be pleas­antly sur­prised when they dis­cover the in­cred­i­ble ad­van­tages hid­ing in an en­dow­ment, es­pe­cially in this in­creased CGT en­vi­ron­ment.

I would like to dis­cuss these ad­van­tages in greater de­tail this week, by specif­i­cally re­fer­ring to trusts (ex­cluded spe­cial trusts which may not have a 41% tax rate) that have a need to in­vest in shares in a port­fo­lio, which can be opened and man­aged within an en­dow­ment.

The tax­able por­tion of a trust’s cap­i­tal gains prior to the bud­get an­nounce­ment ear­lier this year was 66.6%.

This has now been in­creased to 80%, which means that its ef­fec­tive CGT rate has been in­creased from 27.3% to 32.28% (at a fixed tax rate of 41%). Nearly a third of any cap­i­tal gains gen­er­ated within a trust, there­fore, will have to be paid over in taxes.

With shares still re­main­ing the as­set class that of­fers the high­est growth ex­pec­ta­tions, this in­crease in CGT can make a real dif­fer­ence in a trust’s af­ter-tax re­turns.

Al­though the CGT rate within an en­dow­ment has also been in­creased from 10% to 12%, it’s still only 36.5% of the CGT that a trust would have to pay on a di­rect share port­fo­lio.

I’m sure most read­ers would like to stop me right here to point out the ex­tra costs in­volved in an en­dow­ment. These costs are one of the main rea­sons why this prod­uct was such an ex­tremely unattrac­tive in­vest­ment op­tion in the past, so would it still be a worth­while in­vest­ment af­ter tak­ing these costs into con­sid­er­a­tion? In short, ab­so­lutely, yes!

When we take a look at the three largest in­vest­ment and in­surance com­pa­nies that of­fer the op­tion of in­vest­ing in shares di­rectly via an en­dow­ment, you will see that those who in­vest, ad­min­is­trate and man­age R1m in shares via an en­dow­ment, will pay an ex­tra 0.65% (ex­clud­ing VAT) in fees per year, while a R5m port­fo­lio will

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