The Challenges of Investing Offshore without Sound Financial Advice

The South African Reserve Bank (SARB) provides allowances for foreign capital and single discretionary allowances per calendar year.

What is allowed to be moved offshore each calendar year?

Foreign Capital Allowance

Tax compliant individuals, 18 years and older, can invest up to a limit of R10 million per calendar year abroad. This is subject to obtaining a tax compliance status (TCS).

Single Discretionary Allowance

Individuals 18 years and older are permitted to transfer up to a limit of R1 million per calendar year (without the requirement to obtain a tax clearance certificate) which can be used to cover donations to missionaries, maintenance, gifts (except gold and jewelry), loans, travel, study, alimony and child support, wedding expenses and foreign investment.

Proof of these transactions should be retained.

Applications in excess of R1 million are considered on a case-by-case basis.

Individuals, younger than 18 years, are limited to a travel allowance of R200 000. Foreign currency for travel purposes may only be obtained within 60 days prior to departure. Unused foreign currency must be resold within 30 days to an authorized dealer except where the next business trip is within 90 days.

Source: PKF Tax Guide 2024/2025

What must you consider when investing offshore?

Death and taxes (idiom) " Death and taxes " is a phrase commonly referencing a famous quotation written by American statesman Benjamin Franklin: "Our new Constitution is now established and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes."

This is further complicated when you invest outside the Republic of South Africa. Two important implications that need to be considered is situs tax and probate. Both impact the winding up of a deceased estate and may have cost implications.

SITUS (Latin for place to which, for purpose of legal jurisdiction or taxation, a property belongs)

When you pass away in South Africa, the South African Revenue Service (SARS) levies an Estate Duty on dutiable estates above R3,5 million at a rate of 20%. This is for a deceased estate that is under R30 million. For deceased estates above R30 million, SARS levies a 25% Estate Duty. SARS allows for assets bequeathed to a spouse to be excluded from estate duty (Section 4(q) deduction) and the abatement of R3,5 million is available in respect of every estate, however, where a deceased person has a predeceased spouse, the deceased person is entitled to a rebate of R7 million less any amount used by the predeceased spouse’s estate. The maximum that the latter dying spouse can have is R7 million.

This is applicable for assets located in South Africa (SA).

However, if there are assets that are located in the United Kingdom (UK) or the United States (US), then different taxes will apply upon death in these countries. This is collectively known as 'situs' taxes.

In the UK, 40% situs tax will be levied on assets over the value of ￡325,000. Any amount that falls below this will be within the threshold that is called "the nil rate band" and situs tax is not applicable. There is also no situs tax on assets that are bequeathed to a surviving spouse and if the ￡325,000 exemption is not used by the first dying, then there will be a roll-over to the surviving spouse who will have a ￡650,000 exemption on their death.

In the US, there is only a situs tax threshold of $60,000, where the highest estate tax (duty) is levied at 40%. This is 15% higher than what SARS levies on estate above R30 million. Furthermore, there is no exemption for assets bequeathed to a spouse and no roll-over exemptions unless the spouse is a US citizen.

Due to Estate Duty Agreements, between SA and other countries, there are duty agreements where situs tax is applicable. If assets are held in the UK and US, then South Africans may claim a credit for situs taxes paid in these countries. This credit is limited to a maximum of 20% estate duty on assets held in SA. This could result in a total situs tax of up to 40% levied on the assets.

The Executor has the task to ensure the tax credit is claimed and utilized otherwise the deceased estate could pay between 20%-25% estate duty in SA and 40% situs tax. If the Executor is not made aware of offshore assets or is not qualified to deal with such matters, they could be held liable for the taxes and the heirs can be held liable for large penalties.

PROBATE (Latin verb to try, test or examine)

This is the process of distributing assets at death, such as immovable property, personal belongings, bank accounts and investments, either through a valid will or intestate. It is the administration process involved of winding up a deceased estate.

In the UK, there is a similar probate process and SA is recognized under the Colonial Probate Act as part of the commonwealth nations.

The issue arises when assets are held in South Africa and in foreign jurisdictions when an estate is being wound up and the probate process creates an administrative delay. An executor in SA cannot finalize an estate until the grant of probate (letter of executorship) is received from the foreign jurisdiction.

Depending on the jurisdiction, the probate process can take 12 months or longer to finalize, which may place a burden on financial dependents. Investing in numerous jurisdictions only adds to the complexity of the probate process.

An executor in South Africa can charge up to 4.03% including VAT on all assets that they deal with when winding up an estate. This however excludes the fees that are charged in foreign jurisdictions.

What can you do to mitigate situs and probate?

Setting up an offshore trust

The purpose of opening an offshore trust is similar to that of opening a 'living trust' or intervivos trust in South Africa. You want to separate ownership of assets from your personal estate so that they are not subject to probate or estate taxes and create a more efficient estate planning process. Trusts also offers asset protection from creditors and can be used to leave a legacy of assets to beneficiaries. However, one needs to be aware that you relinquish control of your assets to the trustees so you may enjoy the assets as a beneficiary but may not own the assets in the trust.

The primary method of funding offshore trusts is by way of loans and an SA resident may advance loans to an offshore trust provided bona fide (genuine) and at arm's length. A loan account is subject to Section 7C of the Income Tax Act, and potentially Section 31 transfer pricing. However, SARS can view the funding transaction as an affected transaction as defined in Section 31 of the Income Tax Act, in which case transfer pricing adjustments can be made. If this is the case, Section 7C will not apply to that loan.

An offshore trust has to appoint trustees and there are additional ongoing annual fees. The cost to set up an offshore trust can range between $10,000 - $100,000, depending on the size of the assets being transferred and also the complexity of the trust. (Blake Harris: Here's how much it costs to maintain an offshore trust)

The steps to set up an offshore trust typically include:

1. Choosing a jurisdiction: Evaluate different offshore trust jurisdictions based on their legal framework, tax benefits, and stability. The major benefits of offshore trusts are tax neutrality (no income or capital gains tax).
2. Selecting an offshore trustee: Find a reputable trustee with experience in offshore trust administration and a deep understanding of the chosen jurisdiction's laws and regulations.
3. Establishing the trust: Work with the trustee to draft the trust deed and establish the legal structure of the trust.
4. Transferring assets: Transfer assets to the offshore trust, ensuring compliance with legal and reporting requirements.
5. Managing the trust: The trustee will manage the assets in accordance with the terms of the trust deed and the wishes of the settlor.
6. Complying with reporting obligations: Fulfill any reporting requirements, including tax filings, as required by the home country and the jurisdiction in which the trust is established.

Trusts can be an excellent tool for succession planning and to avoid estate duty as well as other costs involved in winding up an estate, however you need to appoint a fiduciary specialist to effectively utilize a trust abroad.

Offshore life wrappers (endowments and sinking funds)

Endowment and sinking funds offer the same benefits with the exception of a life assured, which means at death, the sinking fund will not automatically terminate upon the passing of the policyholder.

Source: Allan Gray

An easier solution in the right circumstances is setting up an offshore life wrapper that is issued by a South African insurer which allows you to nominate beneficiaries which results in no probate as it is not subject to the normal administrative process to wind up a deceased estate.

This means you don’t need an offshore last will or testament, nor are you required to obtain foreign probate, to deal with the offshore wrapper. Holding the investments inside the offshore wrapper also avoids any potential foreign situs tax being levied on those assets.

Furthermore, the investments in the wrapper can continue in names of the beneficiaries or, they can elect to receive the investment proceeds from the wrapper on your death.

The reporting currency can be US dollar, British Pound, Euros, Australian dollar or Swiss Franc.

Further benefits of an offshore life wrapper:

1. No executor’s fees. Although the life wrapper (endowment) usually forms part of your South African estate as a "domestic policy" for estate duty purposes, when nominating a beneficiary, the wrapper will not be subject to executor’s fees.
2. Estate duty (Sinking funds). As sinking funds do not have lives assured, they are simpler than endowments in relation to estate duty consequences and beneficiaries. Only a beneficiary for ownership needs to be appointed for a sinking fund and estate duty will only be payable on the value of the policy where the policyholder was an individual who?passed?away.
3. It offers tax efficiency. The income tax rate in the wrapper (for individuals) is 30% and capital gains tax (CGT) is currently at 12%, which represents a considerable tax saving for individuals with high marginal tax rates (between 18% - 45%). This CGT is considerably lower than that of a local trust, which is 36%. Foreign dividend tax is a rate of 20% for individuals which is applicable to the net of tax withheld at source. All taxation is calculated within the wrapper so there are no reporting obligations for the investors.
4. Access to the investment or proceeds is immediate. Offshore estates can take 12 months or longer to be wound up. In the case of an offshore life wrapper, you will have immediate access to the investment upon your death. This is very beneficial for financial dependents.
5. Liquidity. The life wrapper is structured as a single plan but is made up of multiple underlying policies. The plan holder’s initial and subsequent contributions will be allocated equally to all policies underlying the plan, including in the case of subsequent contributions to policies from which a withdrawal has already been made. There is a five-year restriction period, governed by the Long-Term Insurance Act (Section 63(2)), in which policyholders are allowed to make one withdrawal from each policy underlying their plan, and there may be multiple policies. The five- year restriction period can be extended if a policyholder invests 120% more over one year than either of the previous two years. This is regarded as the 120% rule.
6. Access to investment opportunities globally.? A comprehensive range of collective investment schemes, managed by leading global asset managers, provides exposure to various asset classes, regions and sectors globally.
7. It offers protection from creditors (if an endowment policy). If the life wrapper is an endowment policy, and has been in force for at least three years, creditors will not be able to claim any funds from these investments. Upon the death of the owner, if the owner is survived by a spouse, child, stepchild or parent, the benefits of the life wrapper cannot be made available for the payment of the owner’s debts. The protection continues for a period of five years from the date that the benefits are provided. This is not the case for sinking funds.

An important consideration is the possible scenario of the policy holder and nominated beneficiary passing away simultaneously (for example, a husband and wife). If this occurs, there is no longer a nominated beneficiary, and this could lead to the policy being handled by an executor (executor fees), estate duty, CGT and probate in order to distribute the proceeds.

To avoid this, you can allow for the nomination of an alternative beneficiary, and this provides a "backup" for the financial planner to nominate a new beneficiary.

Creating wealth not only involves investing wisely, either locally or offshore, but also structuring the investment portfolio to prevent avoidable costs at death such as situs tax, probate and estate duty. The most important consideration is the heirs who inherit and the impact the succession planning process has on their lives as death and taxes are unfortunately unavoidable.