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||
* 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.