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Albert Coetzee, Head of the Global Investment Platform at Ninety One, sets out some key considerations when building an offshore nest egg, and warns of the unintended tax and estate planning consequences of an offshore bank account.

Holding cash in a foreign bank account is often perceived as an easy way to gain offshore exposure. If an investor has, however, taken the trouble to convert rands into, say, dollars or pounds to build up an offshore nest egg, they should put their money to work. The reality is that an investor’s foreign currency holdings won’t grow much in a foreign bank account as they’ll be earning little to no interest income. While the rand tends to depreciate over time against major developed market currencies, they could also find themselves on the wrong side of currency moves, and with significantly increased volatility.

Figure 1: The volatility of the rand has resulted in global cash being more volatile than global equities

Even conservative investors who have a medium- to long-term horizon should consider taking on some investment risk to earn a positive real (above inflation) return on their offshore assets. Besides having lazy money that has little opportunity to grow, a South African resident may not realise the unintended tax and estate planning consequences of having an offshore bank account. On death, it can be complicated and costly to deal with an offshore bank account.

Avoid these ‘surprises’

Depending on where the bank account is held, offshore probate may apply when an investor dies. This means that the family may have to appoint an overseas agent, similar to a South African executor, to deal with the bank account. The process can be lengthy and expensive.

Overseas inheritance tax (situs) may also apply, depending on where the account is held. This can be as high as 40%. What’s more, estate duty may be payable in South Africa as the worldwide assets of a South African resident are subject to this tax. There may be a double taxation agreement between the countries that could provide some relief, but it’s still possible that the higher foreign inheritance tax will be applicable.

The foreign bank account will be frozen while the estate is being finalised, and the deceased’s family and dependents will not be able to access the cash until the estate has been wound up.

Investors should choose an offshore investment vehicle that’s suitable for their needs

For investors who have a medium- to long-term investment horizon, there are offshore investment vehicles that will help them grow their money and provide tax and estate planning benefits. They can consider investing in an offshore unit trust fund via a life product, such as the Ninety One Global Life Portfolio.

Some key estate planning benefits of choosing an offshore policy such as this include:

  • Investors can nominate a beneficiary who will receive the benefits on their death. Having a nominated beneficiary helps to avoid some of the offshore estate costs associated with offshore assets not held in a policy.
  • There is no need to appoint a foreign agent to deal with this asset if there is a nominated beneficiary, and no offshore inheritance tax nor South African executor fees will be payable. However, estate duty may apply in South Africa.
  • This investment structure also offers liquidity on death. The nominated beneficiary will have access to the investment proceeds within a short period of time as the asset does not go through the estate. Also, the proceeds of the policy will be exempt from capital gains tax (CGT), if the policy is transferred to the nominated beneficiary. No investment term will apply after transfer.

Investors subject to high tax rates also enjoy attractive tax benefits:

  • No income tax is applicable – only CGT is payable when switching funds or selling units. This is because the underlying investments are in roll-up funds, so interest income and dividends are not distributed – investment income is capitalised.
  • CGT is taxed at a rate of only 12% – versus a maximum effective rate of 18% for investments not wrapped in a policy.

Putting investors’ money to work – choosing a suitable fund

Foreign cash may be prudent for some investors as a short-term parking facility. But it is all too common for investors to have lazy money in a foreign bank account for an unspecified period. Holding foreign cash rather than a diversified basket of assets can be risky, as investors are purely exposed to the exchange rate, which can be volatile. Life products like the Ninety One Global Life Portfolio have a five-year term, so investors should seek out funds that can provide them with a positive real return over time.

Conservative investors who are looking for an alternative to foreign cash, may for example consider investing in a low equity multi-asset fund, such as the Ninety One Global Multi-Asset Income Fund, via the offshore policy. The fund, which aims to produce attractive income with capital growth over the long term, invests in a mix of global fixed income assets and equities. Equity exposure is no more than 40% of the value of the assets in the portfolio.

Investors need to carefully consider the investment vehicle they choose when investing offshore. While opening a foreign bank account may seem like the simplest way to move money offshore, the investor’s estate could face double taxation and will be subject to executor fees in South Africa. The process will likely be drawn out and costly as a foreign agent may need to deal with the offshore bank account.

Besides these constraints, the investor’s cash could see little or no growth over time. Investing offshore via an offshore policy such as the Ninety One Global Life Portfolio provides investors with a range of funds to match their risk profile and needs. They also enjoy tax and estate planning benefits. DM/BM



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