The offshore boom’s hidden trap: Your money may be at risk

It is estimated that R1.5 trillion has legally left South Africa since National Treasury introduced a far greater offshore investment allowance since 1 April 2015. Investments were made in properties, offshore equities, or hard currency in bank accounts.

It was announced in the 2015 budget that SA investors can remit R1 million annually as a single discretionary allowance with another R10 million per year per investor, should certain tax requirements be met. This meant that a compliant family could move as much as R22 million per year (and in some cases more) to the investment destination of their choice.

Astute investors who made use of this change and invested offshore achieved solid returns over the past decade, while the local JSE’s performance was under pressure from the effects of state capture and the damage being inflicted by former President Jacob Zuma. The rand too was under pressure as foreign investors withdrew large amounts of capital from SA bond and equity markets.

At the same time US markets were already showing signs of “American Exceptionalism”, driven by the performance of the Magnificent Seven – companies such as Amazon, Apple, Netflix, Google, and several others.

Early investors who took out R10 million in 2015 and having invested in fast-growing sectors, could easily be sitting with amounts in excess of R100 million and more. Returns of the US Nasdaq and S&P500 have been double and even treble the returns on the local market over the same time.

Others used the allowance when the rand was trading around R12 to the USD to acquire global property, either in Spain, Portugal or Mauritius, and they too have seen very nice increases in value over time.

However, there is now a problem. There was such a rush to get money offshore and protect it against the whims of local politicians, that very little thought was applied to the nature of the offshore structures holding this wealth.

Ideally, any large amount of money should first have been placed in a trust and then invested, which very few companies offered. Investments, properties included, were mostly registered in personal names or joint names if allowed in specific countries. Great as these investments were, they were still in the estate of the original investor and would firmly land in the punitive tax net awaiting death or even divorce.

Today, 10 years later and with the value of those offshore values increasing handsomely in many cases, this has created a problem that needs urgent attention: all those offshore assets are still in personal names and will be dealt with in terms of SA tax laws, which includes punitive taxes such as estate duties and other taxes that come into play when assets are redistributed to spouses, children and even grandchildren.

It is not uncommon for estates to change ownership two to three times in a short space of time, every time having capital gains taxes, estate duties and executor’s fees reduce the original, large estate, to a very small one over time.

There have been cases where the original investor died, soon thereafter the spouse and not long thereafter one of the children. At each death capital gains tax (CGT), estate duty and executor’s fees rapidly diminish the remaining wealth.

In addition, due to enormous delays at the various Master’s Offices countrywide due to incompetence or just total indifference, estates could take anything up to 2-3 years to wind up, often causing major problems to heirs awaiting their inheritances.

All this can be, upfront, solved by the creation of a trust in one of the many reputable jurisdictions such as Guernsey, Gibraltar, or Mauritius.

Mauritius has in recent years made enormous strides in the offering of global financial services and the industry is very strictly controlled by the Financial Services Commission (FSC) on the island.

Do consider setting up an offshore trust in Mauritius as soon as capital is exported from SA in order to invest in either global listed assets or property, either in Mauritius or anywhere else in the world. The longer the delay the greater the cost to rectify the initial mistake. The set-up costs – ranging from $2 500 to $4 000 – is often a very small price to pay when measured against the tax savings over the lifetime of the investment, which often is measured in decades rather than years.

This is particularly imperative for SA investors taking out fresh money, there is no capital gains tax to consider when money is converted from a personal name to the name of the trust.

However, SA tax laws require that such a transfer of money be deemed a loan, and that a certain interest rate must annually be paid to service the loan. This is where specialised tax planning can reduce the cost of the loan (and the interest charged) substantially.

So, when you start taking money offshore, especially if you think you will be moving large amounts every year, is to set up a trust first and then do all the investments via the trust thereafter.

This ensures inter-generational wealth protection, out of the hands of certain greedy politicians who are often threatening a raid on the so-called “wealthy”.

Estate duty for estates larger than R30 million is already 25% and is bound to move higher over time as the Treasury gets more desperate for money.

Setting up of a trust requires specialised tax and estate duty knowledge and experience as each trust is different.

Consult with advisors that have teams of estate planning and tax experts to assist investors in setting up the appropriate trust which caters to your specific requirements. This is an important component of an overall strategy to protect your wealth against the volatile political environment of SA. A Mauritian trust may just be the best way possible to achieve that.