Don’t get caught in the complexities when investing offshore

SOUTH Africans invest offshore for a number of reasons: to protect their wealth from domestic political or economic risk, to access markets and opportunities unavailable locally, or to diversify across countries, regions and currencies.

Without expert advice, however, it’s easy to be tripped up by the complexities that often accompany global investments, such as estate duty, inheritance tax, restrictions on investing offshore and currency fluctuations.

The factors to consider include:

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This tax is paid by the estate of the deceased in the form of estate duty. Generally, the beneficiary who inherits the funds is not liable to pay the tax, because the estate has already paid it. The estate duty rate is 20% on the dutiable amount of estates up to R30 million, and 25% for anything above R30m.

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Most countries have inheritance and estate duties or taxes, and a South African resident who owns a foreign asset may be subject to these. For example, the United Kingdom and the United States apply rates of up to 40% on assets in these countries.

Depending on whether or not an estate duty double taxation agreement is in force with South Africa, the rates levied in the foreign jurisdiction may be in addition to South African estate duty. Where such an agreement is in force, the higher rate of the foreign jurisdiction will typically apply, with South Africa giving a credit against the South African estate duty payable, limited to the amount that would have been payable in South Africa.

• This is the process in which a will is “proved” in a court as a valid public document and accepted as the true last testament of the deceased. Probate will generally be required in the jurisdiction in which an asset is held. This can be a time-consuming and expensive affair if the country in question does not recognise a South African will or executor. An offshore will is sometimes required to simplify the process.

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South Africans can use their annual foreign investment allowance to invest offshore (up to R10m in a calendar year, plus a R1m single discretionary allowance).

The other ways of funding your offshore investment from South Africa are through authorised foreign assets – for example, foreign-earned income or a foreign inheritance – and through an asset-swop facility (this is the “normal investment” route mentioned under “funding mechanism” in the table).

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This is levied at a flat rate of 20% on the value of the property donated. However, donations exceeding R30m are taxed at a rate of 25%. Section 56(1) of the Income Tax Act contains a list of exempt donations, including those between spouses, and donations to approved public benefit organisations. An annual exemption applies on the first R100 000 of property donated.

The four most common ways of investing offshore are:

• Directly in a portfolio of equities;

• In a foreign collective investment scheme;

• Through an insurance wrapper; and

• Lending money to an offshore trust to make investments.

The table compares the main aspects of each investment option.

Nick Jeffrey is a relationship manager at Sanlam Private Wealth.