Moving part of your investment portfolio offshore is an essential part of risk diversification.
Recent changes to exchange-control rules mean a married couple can invest up to R8-million offshore. It’s enough capital finally to make an offshore trust cost-effective. ‘[But] a trust is not the holy grail of offshore investment,” says Larry Masson, wealth manager at FNB Private Clients.
The decision to establish an offshore trust shouldn’t be taken lightly as it has an impact on investors from both a regulatory and a tax standpoint. There’s no ‘one size fits all” solution to diversifying offshore either.
You should consult a professional financial planner to determine whether an offshore trust is an appropriate tool for transferring and housing your offshore assets. You should pay close attention to costs, too.
Offshore trusts are expensive to set up and administer. Depending on the complexity of the trust, it costs between £1 000 and £3 000 to register and between £500 and £1 000 to administer each year. These fees vary according to the complexity of the trust.
‘Offshore trustees charge responsibility fees, administration fees and accounting fees to draw up annual financial statements,” says Jacques Fourie, senior associate legal advisory at Maitland, an international wealth-management company with a trust and commercial services division.
To create a trust with a single contribution of R4-million might not be cost effective, but the equation changes when couples bulk their individual allowances to invest R8-million offshore. Offshore trusts are easy to set up.
Masson says an FNB Private Clients’ customer has to fill out an application form and draft a ‘letter of wishes”. The offshore trust company then completes the required documentation. Once the formalities are concluded, the assets can be transferred offshore.
The first step is to obtain a taxclearance certificate from the South African Revenue Service (Sars). Fourie says the second step is to engage a reputable firm of offshore trustees, which also means deciding on the offshore jurisdiction in which the trust should be domiciled.
FNB Private Clients uses a Guernsey-based trust company. Masson says: ‘We prefer Guernsey because it’s a strictly regulated tax haven.” The country is ‘tried and tested” and at the cutting edge of offshore trust legislation.
Step three is to transfer your money to the client account of the offshore trustees. The transaction is completed by either ‘donating” or ‘lending” your assets to the trustees.
‘Donating” funds to an offshore trust attracts a stiff donations-tax charge. At 20% of an amount in excess of R100 000, the taxpayer suffers a charge of R780 000 for each R4-million donated.
The favoured solution is to ‘lend” the funds to the trustees and charge them a reasonable market-related interest. You avoid donations-tax liability but pay income tax on the interest earned instead.
The main benefits of an appropriately structured offshore trust centre on income-tax savings, capital-gains tax considerations and improved estate planning. Sars views assets transferred destinations as “assets of a South African resident held abroad” — not an ideal situation when you consider they tax your worldwide income and you pay capital-gains tax.
‘You can’t get around this by transferring your assets to an offshore company, as your share in the company is viewed in the same way,” says Fourie. But an offshore trust established in a tax haven’s jurisdiction benefits from that region’s favourable tax dispensation.
Income and capital gains received by or accrued to non-South African resident trusts are generally liable to low or no tax. Provided your assets are transferred to a discretionary offshore trust in an appropriate manner, the future growth on those assets occurs without attracting South African tax.
And assets held in an offshore trust will not be liable for capital-gains tax if you cease to be a tax resident in South Africa, and they will not incur a capital-gains liability when you die. The estate-planning benefits applicable to local trusts apply to offshore trusts too.
Once you dispose of your assets to the trust, they no longer form part of your estate and cannot be attached by your creditors. For the offshore trust plan to be effective, you must make sure the trust is established offshore and managed offshore or its income and capital gains will be subject to local tax legislation. This means that all day-to-day decisions with regard to the management of the trust have to be taken outside South Africa.
There are some drawbacks to offshore trusts. By donating or lending your assets to the trust, you effectively relinquish control of them. And, although the trustees of your offshore trust take into account your wishes, as expressed in the letter of wishes, they are not bound by them.
You must also take cognisance of the specific and general anti-avoidance measures under South African fiscal legislation to avoid costly runins with Sars and the South African Reserve Bank.
Certain trust protections fall away in the event of a divorce. Recent court rulings, both at home and abroad, suggest a gradual shift in how trust law is applied when marriages dissolve.