Good offshore tactics

OPTIONS: ENDOWMENTS OR INVESTMENT ACCOUNTS ARE POPULAR

Some investors may want to set up an offshore trust, while others may have liabilities in SA to settle at some point.

Including an offshore allocation in a retirement portfolio may offer exposure to sectors not represented in the domestic market and diverse economies, says Louise Usher at investment platform INN8.

Global diversification is an important consideration for local investors, but it’s also important to keep a level head.

Regarding estate and inheritance planning, Usher says the benefits of investing offshore comes down to the client’s unique circumstances. Some may want to bequeath assets to a younger generation or pay for children to study offshore and may want to set up an offshore trust or permanent offshore residence; others may have SA liabilities to settle at some stage.

Tax-wise there aren’t significant differences between investing locally and offshore. The one exception is situs tax, levied where investors own UK or US domiciled assets directly. In general, investors will need to pay capital gains tax (CGT) on any capital gain and income tax on any interest or foreign dividends declared.

The bigger question is whether investors want to own their tax liability by owning the assets directly in their name, or a solution that takes care of it on their behalf by investing via a life wrapper where the life company deducts the tax, Usher says.

From an estate perspective, offshore assets will form part of the domestic estate, but where assets are owned via a life wrapper product, investors can avoid executor fees of about 3.5%, she adds.

Two popular investment vehicles used to invest offshore are endowments or investment accounts. With endowments, assets are held through a domestic insurer’s branch in the company’s name, for the client’s benefit. Investors can’t withdraw more than the initial lumpsum plus 5% or contribute more than 20% more than they did the previous year. A five-year fixed term is applicable, Usher explains.

With an investment account, investors hold the assets in their own name; there are no rules around withdrawals or fixed investment term.

Choosing the most appropriate vehicle depends on the invest- ment objective and the individual’s tax situation, she says.

Where investors use their full CGT exemption of R40 000 per annum, they may benefit from an endowment, as it offers a lower effective CGT experience.

But where investors don’t use the full R40 000, it could make sense to use an investment account, Usher says.

Another important consideration is whether the assets are intended to form part of an investor’s estate or if they want to donate the assets to a child or spouse. Where investors want to donate money to children to buy a property overseas, an investment account will be a more appropriate option as there are no liquidity restrictions.

An investment account is also more suitable to first-time investors who may only have smaller amounts to invest once a year or once a quarter. In the case of extremely wealthy investors, an endowment may be more appropriate, Usher adds. – Moneyweb

Endowments are more suitable for the wealthy