Director of Robert Cowen Investments, Di Haiden discussed what to take into consideration when investing offshore. Di looked at the options available to investors from a structuring perspective, including preferential jurisdictions.
Offshore considerations – What do we need to think about?
Quantum of funds
It is important to know the amount of money you plan to send offshore – either by way of a single discretionary allowance (SDA) or your R10mn plus SDA (and we note that several people from one family can each send their SDA). The quantum of funds and the timeline for transferring funds offshore determine what happens with respect to which structure may or may not apply. Once that decision has been made, we can look at the amount available for offshore investing, discuss, and provide advice. It is also important to remember that it is always very case-specific and there is no one-size-fits-all answer/approach.
The products that you can invest in include (amongst others):
- Unit trusts.
- Hedge funds.
- Share portfolios.
- Fixed income products.
- Listed notes
- Exchange traded funds (ETFs).
We can assist an individual in investing in any of these products, but your financial advisor (FA) would need to guide you depending on what your risk profile is, where in the world you want to invest or live, etc.
Once you have decided on the amount that you want to invest offshore, the next step is to decide (together with your FA) on the jurisdiction WHERE you want to invest. This is purely an investment decision, but it will influence several things including:
Situs is Latin for ‘site’, so the situs of an asset is usually the place where an asset is located for legal and tax purposes or the place to which property belongs for legal and tax purposes. Common reporting standards were introduced several years ago and signed by jurisdictions globally. These reporting standards enable tax authorities in all jurisdictions to share information. Thus, everybody has become much more aware of what the tax jurisdictions are globally and how they affect where you invest your money. For example, in the US, if you die the estate duty on listed shares can be as high as 40% – double the rate in South Africa (SA). Meanwhile, in a country like the UK, 40% situs tax will be levied on situs assets over GBP325,000 – both on shares and cash. It is therefore very important to understand the implications for you re the country or countries where you are investing. We note that double taxation agreements also come into play here.
You have transferred an amount and decided what you want to invest in and where. Based on those decisions, do you require a structure other than holding assets in your own name and, if so, which structure is appropriate for you in particular? The options that are currently available include holding the assets in your own name (you), while others wrap the investment, or assets can sit within a structure. These options include:
- Wrapper: An endowment that wraps the asset – a wrapper mitigates the tax effect, but you still pay estate duty.
- Offshore trust – invest the funds in an offshore trust.
- Pension plan.
- A company that sits under the trust or where you are the only shareholder.
- A family foundation.
Each of these has its advantages and disadvantages and we can provide guidance as to how they will impact you. For example, a wrapper does influence the tax you have to pay and, while it mitigates taxation from an SA point-of-view, you still have to pay estate duty, while within an offshore trust the assets are not taxed but it has tax implications for the beneficiaries, depending on where you are a resident etc.
In terms of companies, we touch on looping structures below and a lot of these structures are known as estate duty blockers and can be used effectively in that way. Always remember, however, that if you are in a structure there are extra costs, you need to understand these costs and it is always important to weigh up these extra costs vs the benefits of the structure.
Now that you have decided you do need a structure because you have, for example, R50mn offshore and you would rather have it not held in your own name, you have to decide where you want the structure to be held. Jurisdictions for these types of structures include the British Virgin Islands, the Channel Islands, and Mauritius (where we have an office that has been hugely beneficial for clients
Offshore structures can now hold assets in SA. One of the possible advantages is reducing dividend withholding tax (DWT) but it is complicated and only really applies to corporate structures. Be aware that where the holding company and the offshore trust are situated should preferably be in a territory with a double taxation treaty with SA. So, if you decide you do want a structure then you should look at where you want the structure to be held.
In January 2021, the prohibition against so-called loop structures was removed from the exchange control (ExCon) regulatory framework. In terms of Notice 1 of 2021, circulated by the South African Reserve Bank’s (SARB’s) Financial Surveillance Department (FinSurv), the removal of the prohibition took effect on 1 January 2021 for certain residents, most notably natural persons (but not local trusts).
A loop structure is a structure where an exchange control resident holds, for example, SA assets via an offshore structure, or where an SA resident has an interest in an SA asset indirectly via their interest in an offshore entity. We note that the concept of an asset is a broad one for these purposes. This is important for several reasons: first, the prohibition against loop structures has for years been a significant planning impediment for SA residents. It is therefore a welcomed development that South Africans can now structure their estate plans and other ownership affairs free of such encumbrances. In addition, and as is pointed out by the notice amending the prohibition against these structures, this should (amongst other things) facilitate inward investment by offshore entities in which SA residents have an ownership interest. It is believed that the funds available in these types of structures is substantial.
Furthermore, it creates interesting estate planning opportunities: Many South Africans who have been taking money abroad in terms of the various offshore allowances, have offshore estate planning structures as well as onshore structures, which house their local assets. This duplication is costly and unnecessary. The removal of the prohibition against loop structures assists South Africans in that they can avoid doubling up on these structures and, where desired (which is commonly the case), can have offshore as their primary estate planning base; and now this structure can also own the local assets.
Besides purely structural benefits, there are several immediate tax efficiencies that can be achieved by virtue of implementing these structures: An individual can, for example, now move income streams abroad legally, without necessarily having to move the funds via their personal estate. In other words, historically, most funds externalised, or externalised by natural persons, created an estate duty trap. However, if a loop structure is correctly planned, funds can be externalised without going via a natural person’s estate, thus reducing a potential future estate duty liability.
Moreover, there is a potential dividends tax reduction if an offshore structure is genuinely based in a jurisdiction that has a double-tax agreement with SA.
Taxpayers should be mindful of the capital gains tax (CGT) cost of moving local assets into a loop structure. These may be managed in certain circumstances, but professional advice should be sought.
In summary, the amendments to the loop regime are hugely significant and must not be underestimated. All South Africans should be looking at their respective estates to determine whether their estate planning structure can be enhanced or improved by utilising loop structures in one form or another. However, we highlight that this should be used in the case of a corporate structure rather than being considered by individuals (unless there are companies involved in an individual’s estate).
All that we have spoken about above impacts your estate (what you own in SA or offshore). There may also be no tax advantage to investing offshore but it is a way by which to diversify your asset base. The following needs to be considered when undertaking estate planning:
- Worldwide assets.
- Situs issues.
- Local and/or offshore will?
It is important for you to understand how each jurisdiction (such as the US, UK, Europe, etc.) works to quantify what the issue might be for you. Probate is the same as the winding up of an estate in SA (in the UK and the US it is called probate) and it is important to understand where your assets are. For example, if you want Portuguese residency and you buy a property in Portugal, this will have consequences for your estate and for your will. If you hold a property in Portugal, you may find it is subject to forced heirship, which also applies to several other European countries and which means that certain relatives (spouses and children), have claims to a certain portion of your estate regardless of what is in your will. What you think will happen in your will is not necessarily what will happen when you die, and you need to be aware of all assets in all jurisdictions to decide whether you need a local (SA) and offshore will or just a local will. If you are diversified globally, you can chat to us, and we can assist in advising you as to what is good for you and what is not.
Also, it is important to know where your family is and what the implications are for your estate – are they all in SA, or have they moved overseas to countries such as the UK, Australia etc.? If you are considering emigrating from SA, then weigh up your options very carefully – there are many available options, but each option has its own implications. Remember, on leaving SA there is an exit tax to be paid. Very often we find that SA tax residency is not that bad when compared to other countries. In Spain, for example, taxation is very onerous, and you might consider remaining an SA tax resident. So, it is important to think carefully before you leave.
For all the abovementioned reasons and in terms of having assets offshore, it is a big world out there and we do need to look at the variety of options available. We can assist and advise you as to the best course of action to take.