Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

If you are a South African taxpayer, then you will be taxed on your worldwide assets regardless of how you obtained them.  These shares would therefore trigger capital gains tax and estate duty should you pass away.

In order to make the inheritance process smoother and prevent leakage when it comes to the various taxes that would be payable upon death,  I would recommend that you consider the following:

Your will

If you only have one will for all your assets, the transfer of the South African assets to your beneficiaries cannot take place before the offshore element has been dealt with. This can cause significant delays as your local will needs to be sealed and sent across to the overseas country where your other assets are held.  If you have assets in a number of countries this process would have to be repeated for each country.

By having separate wills for your local and offshore assets, you can speed up the process as the wills will be dealt with concurrently and not consecutively.

Be careful of inheritance taxes

If your share portfolio is worth more than 325 000 pounds, it could trigger an inheritance tax of 40%.  (in the USA, this threshold is only $60 000). 

If your offshore holdings fall into this category, I recommend that you consider moving these assets into a structure like a sinking fund or an offshore endowment. This would result in them being deemed an asset in your South African estate and you would only have to pay estate duty of 20%. 

Probate costs

If you have offshore assets, you will need a grant of probate in order to have your will executed in another country. This can be a costly and time-consuming exercise. If possible, you should look for ways to attach a beneficiary to an asset so that it may be transferred directly without having to go through your will.

Recommendation

I would recommend that you speak to a financial advisor about your situation and get him or her to consider moving your assets into an offshore sinking fund or endowment structure.

There are a number of advantages to doing this:

• You are limited to only paying South African estate duty which should be lower than the inheritance taxes
• there is no need for any probate and its attendant costs
• inheritance will be quick and take place within weeks rather than months or even years.

On the other hand you also need to consider the downside of going this route:

• There is an underlying cost to holding an investment in a structure
• Moving your shares into a structure like this will trigger the immediate payment of capital gains tax. While this will result and your new investments starting at a much higher base level for future capital gains tax it is something that would need to be considered.

Even though your assets are deemed to be an asset in South Africa for estate duty purposes, there is no need to ever bring them back to South Africa. This structure will allow your beneficiaries to have a solid offshore nest egg.