I have offshore funds in a foreign bank. How can I invest these offshore?

Thanks for the question. Converting funds into foreign currencies is a good first step towards diversifying your portfolio and reducing risk in the face of the volatile rand. However, foreign bank accounts are notoriously poor investment vehicles because interest rates on savings accounts are extremely low. For example, a savings account in South Africa should earn around 5% per annum, while those in the UK should earn around 0.75%.

Therefore, it is necessary to transfer this money into an interest-earning vehicle, which can be done easily. Many South African-based asset managers offer offshore investment structures and have offshore homes based in jurisdictions like Guernsey or Bermuda. These institutions accept deposits in many currencies, including USD, GBP, EUR, and AUD.

Additionally, it would be in your best interest to consider how offshore investment structures can help you from both an estate and tax perspective. When considering taxation, a popular offshore investment vehicle is a global endowment. An endowment offers investors with high marginal tax rates the opportunity to invest in a tax-efficient manner. In the case of individuals, income tax and capital gains tax are 30% and 12% respectively. Dividend withholding tax (DWT) is levied at 20% for individuals.

Comparison of effective tax rates

Income tax Capital gains tax
People 18%-45% 7.20%-18%
Trusts 45% 36%
Companies 28% 22.4%
Endowments 30% 12%

Another relevant question is how these structures can help from an inheritance rights perspective.

On death, South African residents are liable for inheritance tax based on their worldwide assets. Inheritance duty is levied at a rate of 20% on an inheritance value up to R30 million and at a rate of 25% on an inheritance value over R30 million.

What is not so well known is that in the event of death, the UK and the US also levy inheritance tax on certain situated property, i.e. property which is physically located within their jurisdiction. In the UK this is known as Inheritance Tax, while in the US it is known as Inheritance Tax. Collectively, they are known as location taxes. This is important to note if you have assets in either country.

In the UK, a 40% location tax is levied on assets worth more than £325,000. Any amount below the £325,000 threshold is known as the “zero rate band” and is exempt from location tax. No situational tax is levied on assets bequeathed to the surviving spouse. Additionally, if the assets are left to the spouse, causing the £325,000 exemption to remain unused, the exemption is transferred to the spouse. The spouse will then benefit from an exemption of £650,000 on their death.

In the United States, the threshold for situs tax is much lower, at just $60,000, with the top tax bracket being 40%. Unlike the UK, the US does not offer spousal exemptions or rollovers unless the spouse is a US citizen.

Using an offshore endowment removes any potential status issues associated with investing in a foreign jurisdiction. Instead, these funds are considered part of your South African estate, where you will pay inheritance tax ranging from 20% to 25%.

I hope I have answered your question and provided you with some tips for investing abroad. I recommend that you consult a financial advisor who can help you with your specific needs and obtain more information on liquidity, risk profile and tax efficiency.

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