Question: We have a family trust that holds a large portfolio of shares and unit trusts. We recently sold some of our holdings and I was shocked by the amount of capital gains tax that we paid. Is there anything that we can do to reduce this in the future?

Answer: The capital gains tax (CGT) rate for trusts is high. It has an inclusion rate of 80% and a marginal tax rate of 45%, giving you an effective CGT rate of 36%.

Now if you were an individual, your inclusion rate would only be 40%, so your CGT would effectively be 18% if you were at the maximum marginal tax rate.

If you have any longer-term investments in a trust, I would certainly recommend that you consider using a sinking fund structure for them. A sinking fund is a lot like an endowment, except there is no life assured. This means that a trust can own a sinking fund.

The big advantage of using a sinking fund is that the assets will be taxed at the life assurance company rate of 30%. Any capital gains within the sinking fund will have an inclusion rate of 40%, thus giving an effective CGT rate of 12%. This means that by holding your assets in the sinking fund your CGT will be one-third of what it would have been had the assets been held directly by the family trust.

So, to summarise:

The downside of having any investments in a sinking fund structure is that there will be liquidity issues for the first five years of the investment, as there is a restricted period for withdrawals. After the five years, you may make withdrawals from this investment whenever you like. I would therefore only recommend it for the longer-term parts of your portfolio. As trusts typically have a long investment time frame, this should not be a showstopper.

Local trusts are prohibited from making direct offshore investments. However, if your local trust wants to increase its offshore exposure, it can use the sinking fund vehicle very effectively to do this. The way this would be done is to invest in offshore assets using the asset swap capacity of a local asset manager. This is a fantastic way to reduce the risk of the trust having all its assets in one country.

Trusts offer a great way for families to preserve and grow their wealth for future generations, and clever financial planning can certainly help reduce any leakage when it comes to paying tax. DM

Kenny Meiring MBA CFP is an independent financial adviser.  

You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to [email protected]

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.