By Tracy Muller, Head: Fiduciary at Nedbank Private Wealth

Individuals are often driven to invest internationally for the wrong reasons, as emotions override financial acumen. They often only consider investing internationally when the rand starts depreciating against other currencies. But investing internationally should rather be a decision taken as part of an overall sound financial plan.

Any sound financial plan should include diversification to try and minimise risk in various forms – namely, to minimise currency risk, geographical risk, and one’s overall exposure to one specific market.

It should be noted that currencies are very difficult to call. It is important to consider financial planning for the longer term and not for speculative short-term purposes.

The landscape for investing internationally

There has been a gradual easing of exchange controls over the past decade. In addition to the so-called ‘indirect’ international investments, ie, investing in South African based companies who have dual listings (where the proceeds must ultimately be returned to South Africa and are paid in Rands) or by investing via an institutional foreign investment allowance (previously asset swap investments), South African resident individuals can obtain ‘direct’ exposure by utilising the following exchange control allowances:

• R1 million annual discretionary allowance which may be used for various purposes, for example as a travel allowance. The unutilised portion may be used for investment purposes.
• R10 million annual individual foreign capital allowance.
• In addition to the above, the South African Reserve Bank is considering applications submitted on
  behalf of individuals to obtain permission to externalise amounts over and above the amounts listed above.

Recommendation for international investing

The choice on how to invest internationally will differ from one individual to another, depending on their specific financial needs and circumstances. It is however important to match your South African expenses with South African income. In other words, it’s important to ensure that you’ve got sufficient capital invested locally to produce the required income in order to meet your financial obligations in South Africa. By doing this, you effectively take out any potential currency fluctuations.

Tax considerations

South African residents are taxed on a residence-based system of taxation when investing internationally. No matter where in the world your assets are situated, or how they were acquired, South African residents are taxed on, and obliged to declare, their world-wide receipts and accruals (worldwide income and capital gains).

Likewise, South African residents (with relatively few exceptions) are liable for South African estate duty on their worldwide assets including, in particular, the assets remitted abroad in terms of the investment allowance facilities.  This fact and its effect are not commonly appreciated.

With estate duty rates in South Africa at 20% and the prospect of the rand depreciating further, the rand value for estate duty purposes of the funds exported is likely to increase over the years, thereby increasing liability to estate duty.  Therefore, it is important to consider ‘pegging’ the value of the assets in rands, for South African estate duty purposes.

Structuring your wealth

Before considering international investment options, it is essential to ensure that the right international structure is in place, for both during and after your lifetime, in which to manage your wealth.

The ‘pegging’ of the value of assets in rands, for South African estate duty purposes (as highlighted above) is easily achieved by transferring these assets into an international trust, whether existing or new. While the original rand value will form part of the individual’s estate for estate duty purposes, any growth in the value of the trust’s assets through asset appreciation and/or rand depreciation will be protected from estate duty. There are however various technical considerations, which should be discussed before establishing an international trust, and therefore it’s important to seek appropriate advice.

In addition to pegging the value of the assets in rands for South African estate duty purposes, the international assets transferred will not be required to go through the tedious and costly process upon death of applying for foreign probate in the country in which the assets are registered. Other advantages of an international trust are that it provides for continuity, orderly distribution of assets after death, flexibility, protection for dependants, protection against creditors, protection of assets in the event of divorce, and protection of assets against seizure.

It is also important to determine the tax consequences pertaining to the different investment options. As an example, if a buy-to-let residential property is acquired in the United Kingdom, the UK tax consequences must be fully considered – all UK situs assets held by foreigners are subject to 40% inheritance tax if the value of such assets exceeds the current NIL rate band in the UK, which is currently £325,000, with roll-over relief between spouses being available, ie £650,000 on death of the surviving spouse. A possible solution however may be to consider purchasing a buy-to-let residential property via an international property holding company, the shares of which are held by an international trust.

While it’s never too late to structure your international wealth, deciding on an optimal structure within which to house your international assets and investments as early as possible can ensure that:

• you minimise the impact of costs, such as estate duty and/or foreign death duties, on the capital appreciation of your portfolio;
• you have optimal structures that are flexible enough to cater for life’s unexpected twists and turns; this means that your international wealth is both protected and available to beneficiaries should you not be.

How you wish to structure your wealth is determined by:

• your unique needs and circumstances;
• legislative, regulatory and compliance requirements; and
• taking your entire wealth into consideration.

Nedbank Private Wealth has a team of dedicated in-house fiduciary specialists who work closely with international trust colleagues located in the Channel Islands. The diverse talents of experienced and dedicated fiduciary specialists, together with our international trust colleagues, are pooled, enabling them to provide and facilitate (where necessary) highly specialised international structuring services.

This team approach enables fiduciary specialists to stay abreast of the latest legislative and regulatory changes and thus embrace the complexity and nuances of structuring family wealth.