Most investors recognise that offshore investing is part of a robust investment strategy. There are a variety of ways to invest offshore and various structures that can be utilised to suit investors’ current situation and future needs. 

Some of the better known ways to gain offshore exposure are through foreign currency denominated offshore funds and Rand denominated offshore funds. 

Direct offshore investments in excess of R1 million require investors to get tax clearance from SARS before they can convert their Rands into foreign currency and physically transfer such offshore. The money is through either a local or an offshore administrator. Investors can also approach an offshore investment manager directly but they may experience challenges, for example, high minimum investment amounts for direct investments.

Rand-denominated investments enable investors to invest offshore through a locally administrated unit trust that invests in offshore assets. There is no need for investors to physically convert their Rands into foreign currency. There is also no limit on the amount that may be invested through a Rand-denominated offshore fund, and investors do not require SARS tax clearance. Investment reporting, additional investments, and withdrawals  are done in Rands. 

Ways to gain direct offshore exposure include vehicles like a life wrapper or offshore endowment policy, an international retirement plan or an offshore trust. Each product differs with regard to liquidity, income tax, fees and currency. 

The comparison of a unit trust with a life wrapper below illustrates some of the key differences:

Unit trust  Life wrapper / offshore endowment policy*
Nominate a beneficiary/ies  No.  Yes. 
Term  Investment is fully liquid.  No term, but restrictions apply in the first 5 years. 
Additional contributions  No restrictions (other than it must be within the investor’s annual foreign investment allowance and meet the administrator’s minimum amount). 

First 12 months: no restriction

Second year: 120% rule applies (e.g. up to 120% of first year’s contributions).

Thereafter: Maximum of 120% of highest annual contribution of previous 2 years.

Surrenders  Allowed at any time. Withdrawals may be allowed in the form of a loan.  One or multiple surrenders allowed (depending on the administrator). Surrender may not exceed capital plus 5% compound growth per annum. 
Tax on growth  Growth is taxable in the hands of the investor. The tax rate on foreign dividends is 20% and interest is taxed at the investor’s marginal tax rate. No tax on growth for individuals.
CGT on surrenders and/or switches 
  • Capital gains is included at 40% or 80% of the taxable income of the investor, depending on the entity, and taxed at the investor’s marginal tax rate.  
  • The foreign capital gain or loss is calculated and converted into Rands using either the average exchange rate or the exchange rate on the date of sale.
  • Tax is charged i.t.o. S29A, which is the four fund approach. Capital gains are taxed at 12%.
  • CGT is only on foreign currency gains and not on Rand gains.
  • All tax payable is withheld by the administrator and there is no need to declare it on a personal income tax return. However, it has to be declared in the investor’s statement of assets and liabilities.
Estate planning 
  • Asset to be included in the estate if the investment is in the name of an individual and estate duty of 20% is applied if it exceeds the annual abatement. 
  • For assets registered in some foreign countries, estate duties may apply even if the investor is not a resident of that country.
  • Executor’s fees apply. 
  • Might require an offshore will depending on the jurisdictions of where the assets are held. Cross-border estates require careful planning and professionals should advise investors on will structuring. 
  • Deemed an asset in the estate if in the name of an individual. 
  • No estate duty when a spouse is nominated as a beneficiary. The spouse will pay estate duty at death. 
  • Proceeds are not frozen and are transferred directly to beneficiaries. 
  • No executor’s fees when beneficiaries were nominated. 
  • Not impacted by investor’s will. 

* Terms and conditions may differ per product provider.

Where and how to invest clients’ money offshore may require additional planning. By choosing the right vehicle, however, you can help your clients grow their wealth through global diversification in a cost effective and tax efficient manner.

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