How should you implement your offshore decision?
Well, the answer really depends on your view of the future in SA. If you believe in the “complete collapse” scenario, then the best thing to do is sell everything and emigrate as soon as possible. No other decision makes sense.
If this seems a little extreme, then read on…
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There are 5 key considerations for SA investors when going offshore
Taxes, Custody, Investments, Exchange Controls and Exchange Rates.
Consideration #1: Taxes
This may surprise you, but SA is not the worst tax jurisdiction in the world, especially if you look at estate duties or death taxes. If you wish to leave a legacy to your spouse and kids, it’s often better to pay SA estate duties rather than the tax on foreign investments. This is especially true when it comes to UK and US investments.
There are ways to reduce your tax burden but, you should speak to an expert to determine which method is best for you. There are many personal factors that will affect your optimal investment structure.
Consideration #2: Custody
This refers to the institution where you hold your assets. Many South Africans who invest offshore don’t directly own their investments.
Rather, the institution you invest in owns them and you have a claim on the institution. In the event of a default by the financial institution, you could easily end up with nothing. Make sure you understand clearly who is keeping your funds safe!
Consideration #3: Investments
I have personally met several investors who have been holding large cash balances offshore for over a decade! Cash is not a good long-term investment. This is true both in South Africa and overseas.
Long-term investors need to invest in assets with growth potential. If you’re looking for growth assets, you may consider something like an S&P500 ETF tracker or the MSCI World linked investment. It provides both diversification and a cost-effective entry for investors.
A direct equity portfolio can also be quite attractive if you meet certain criteria. Bonds, especially dollar or euro denominated bonds, have fallen out of favour with many investors who don’t consider them an attractive investment given the historically low interest rates we have these days.
Remember, simply being offshore is not enough. Make sure you are investing in both the correct asset class and worthwhile underlying assets.
Consideration #4: Exchange Controls
You can take R1 million out per a year by simply signing a declaration. If you get a tax clearance, this goes up to R11 million per year.
More than this requires special approval. Exchange control regulation is a factor every SA investor should consider carefully.
It will affect the timing, maximum value and speed at which you can deploy funds.
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Consideration #5: Exchange Rates
Over the years I’ve noticed investors tend to panic whenever the currency falls sharply.
They then become complacent when rates start to improve. In other words, they’ll often move funds offshore during currency weakness and fail to take advantage of periods of strength.
The best investors tend to make the decision first, and then carefully implement their exit over time. It’s also important to understand, it is very unlikely you will pick the exact bottom or top of the exchange rate. And most often, choosing the right investments will be far more important that the exact currency rate at which you exited.
But, what I will say, if you’re trying to time a great exit, if you’re moving when everyone is panicking it is almost ALWAYS the wrong decision.
If you have made the decision to invest in an offshore product, or with a specific provider, and don’t have total clarity on the 5 points discussed above, you’re doing something wrong. Very wrong.
Before you make your offshore move, ask yourself:
1. Do I understand the tax implications of my investment?
2. Do I know who is ultimately responsible for the safekeeping of my investment?
3. Do I know which underlying assets I will have exposure to?
4. Have I understood the costs, timing factors and constraints on future capital transfers?
5. Am I moving money today because I am scared? Or because I have a well thought out objective and sensible plan for achieving it?
If you can’t answer the questions above with confidence, I would highly recommend contacting either me or one of the advisors I work with to assist you in filling in the gaps.
The best way of contacting us is via the email@example.com
email address. If you mark the email ATT: Viv, I will do my best to respond to you personally!
Rand Swiss, Wealth Manager