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It's My Money with Ruan Breed · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  This edition of It's My Money is brought to you by Brenthurst Wealth, your partner
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  for global wealth creation.
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  Welcome to It's My Money.
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  It's My Money is brought to you by Brenthurst Wealth, South Africa's
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  multi-award winning boutique wealth manager.
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  I was sent an article from the desk of Ruan Britt and it says the following.
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  With offshore investing, the structure matters as much as the exposure.
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  And reading the article, you get the gist that the whole gist of it is not where,
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  but how.
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  Where is very important, but not where, but how is the subject matter here and the
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  subject matter of this podcast.
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  And the author of this article, Ruan Britt, is here with me.
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  Ruan, what do you mean by not where, but how?
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  Yes, thanks, Lindsay.
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  Thanks for having me.
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  It's a pleasure.
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  Yes.
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  So I think the heading of the article is pretty much, you know, it says it all.
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  I think I think We tend to find a lot of clients knocking on our door with
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  substantial offshore
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  assets and financial investment portfolios.
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  But, you know, the underlying securities might have been managed well over time.
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  The right stocks have been picked, money has been made.
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  But then you come to the more legal compliance side of things with regarding
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  estate tax,
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  capital gains tax and all those kind of things.
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  And you find out that actually there's the underlying structure in which the
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  portfolio has been invested in,
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  as well as a lot of water leaks in terms of tax, tax planning, offshore inheritance
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  taxes,
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  estate duty, estate fees, all those kind of things when it comes to, you know, the
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  money moving hands in future.
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  So if somebody, for example, did it by themselves and a couple of years ago
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  decided that they wanted
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  AI with their offshore exposure.
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  which they'd taken out legally.
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  And, of course, a financial advisor will tell you all about that.
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  But that person just put his or her money into AI stocks, does really, really well,
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  sells out right now,
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  makes a fortune, but then comes up against a few problems.
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  Is that the sort of scenario you might be talking about, talking about people trying
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  to avoid, that is?
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  100% spot on, Lindsay.
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  And, you know, that's what I was referring to in the article as well.
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  The actual ownership and how the investment is held by the investor or the
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  client.
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  You can easily erase a lot of gains and hard work and research in the market by
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  not having your structure
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  spot on and not having your way of holding the investment structured accordingly.
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  And it comes down to various aspects such as, like I mentioned, capital gains,
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  tax at the end of the day, estate duty, executors fees, all those kind of things.
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  erode and eat into your returns,
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  making all the hard work almost null and void.
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  Yeah, it certainly does erode some of the wealth that you thought you had made,
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  thought being the operative word here.
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  Let's go through the various items that you've just talked about.
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  The tax bill that doesn't disappear when you stop working.
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  So we're going to talk about tax first.
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  Tell us about tax implications, because there are tax implications in different
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  jurisdictions, of course.
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  That's 100% right, Lindsay.
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  And it differs from country to country and where your assets are held,
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  how your estate and your assets are treated when you pass away in South
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  Africa,
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  or even when you just divest your assets in South Africa compared to the US,
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  compared to Europe, the UK,
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  all of it differ.
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  And not only is the cost side of it,
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  the tax and the estate duty and the estate fees a major factor, but then also...
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  timing and illiquidity.
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  You will be surprised to find out that a lot of supposed to be liquid portfolios
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  actually turn out to
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  be rather illiquid, especially on death of an investor and when the money needs to
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  move to a
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  long-living spouse or children who might be dependent on that capital.
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  And that capital can also, despite all of the costs, also be locked up, as a matter
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  of fact,
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  for a couple of months after the passing of the investor.
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  that normally can lead to...
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  A situation where the family is asset-rich but cash poor,
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  and that's something we would like to protect our clients from.
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  Okay, now this is where it gets complicated for somebody like me, Ruan.
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  So be gentle with me, please.
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  You say how the endowment wrapper changes the picture.
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  And from what you say, it's an underused concept, the endowment wrapper.
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  And it's probably because of people like me that just say, I don't know what that
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  is, I don't want to do it.
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  How does it work and why does it benefit an investor?
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  Yes, that's right, Lindsay.
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  And I think it's something that flies under the radar quite often because it
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  comes with a little bit of a layer of complexity.
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  And I think that scares some people, but at the end of the day, it's actually quite
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  simple.
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  Mainly what it does is it first brings your capital gains tax or your effective
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  tax rate down from
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  18% as an individual in your own hands to 12%, which is a saving of already 6% of
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  the tax.
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  But...
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  Further also, the funds that's being used in these wrappers are what we call roll-up
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  funds.
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  So instead of paying out the interest or the dividends that you earn as income or
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  the capital gain,
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  which would have been taxed up at 45% in high income taxpayer's hands,
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  those returns will be reinvested back into the fund price and rolled up as capital
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  gains and not regarded as income by
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  SARS.
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  So that's one of the many things, you know, or the benefits in terms of in the
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  client's hands.
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  And this essentially does two things.
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  Firstly, it reduces the tax rates on your returns to a rate of 12%, but it also puts
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  you in control of,
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  you know, when your tax bill arrives and how to manage your taxes.
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  Yeah, you give a couple of examples there, direct holding versus endowment.
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  And I would drive people to the BizNews article by Ruan, which I...
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  Is it still up on the website, Ruan?
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  Do you know?
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  Yes, it's still up.
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  And it normally stays up for quite long.
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  Okay, good.
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  So go to BizNews just to have a look at the table I'm looking at.
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  Direct holding versus endowment.
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  And again, another one, the numbers.
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  You say CGT, capital gains tax, on 5 million gain, direct versus wrapper.
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  So you give the examples there.
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  You also start to talk about what happens to your estate.
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  You say the tax efficiency is compelling on its own.
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  But the estate planning benefits are where we see some of the most significant
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  savings and where unstructured offshore
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  holdings, like I talked about simply in my introduction, can cause the most damage.
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  Can you expand on that, please, Ruan?
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  Yeah, that's right, Lenja.
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  That's what I referred to earlier as well, especially when investors pass away and
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  that money needs to change hands.
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  Something that also plays a very big role is the...
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  process of probate offshore which is the equivalent of South Africa's master offers
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  and the process of
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  winding up an estate and what you face there is you know potential delays in the
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  winding
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  up of your of your estate and
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  you know executors fees like I mentioned in foreign jurisdictions the cost of
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  getting all this wrong can become very
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  real so any assets held within the endowment
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  that sits outside of your duty with the state in South Africa will bypass the
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  executor entirely
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  in this instance.
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  So you'll be liable for state duty, but it doesn't have to go through the whole
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  probate process or the master's
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  office in South Africa's case, meaning you save a lot of time and fees in that
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  regard.
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  The next headline is after five years full flexibility.
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  And again, I'll just go into the first sentence or two.
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  It says, it's important to mention that the endowment And...
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  does have an initial five-year restriction period.
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  This is a standard feature of sinking fund policies under South African insurance
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  legislation,
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  and it limits certain withdrawals during that time.
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  But that seems like a restriction, but actually, in practice, it's not in the
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  longer term.
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  That's right.
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  That's right, 100%, Lindsay.
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  And, you know, like I say, the article might seem like restrictions, But.
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  But for the investor at the end of the day, with a medium to a longer term
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  horizon, investment horizon,
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  it's basically a practical obstacle.
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  Because as soon as you take money offshore for investment purposes, you would like to
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  take an investment period of, I would say,
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  at least at the very least five years.
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  So it sort of, you know, counters that lockup period.
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  And also once the five year period is up and your investment continues, it becomes
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  an open ended.
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  investment policy where you can make regular withdrawals or switches, manage a
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  portfolio in various circumstances.
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  So I would say, you know, for investment purposes,
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  that's almost the lockup period is almost sort of invalid or irrelevant.
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  The endowment you've been talking about, the wrapper, etc.
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  It's not for everybody, though.
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  I mean, it's not a one size fits all solution, is it?
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  Tell us who it's really designed for and who shouldn't be looking at it.
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  Yes, I think, you know, Lindsay...
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  In all honesty, this is a very good structure to use for high net worth
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  individuals,
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  especially high income earners falling in the 45% income tax bracket.
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  This is exactly where it adds value because of the fact that your marginal
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  income tax rate sits at the
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  45% level.
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  Any capital gains that you will incur in a year of assessment would fall in the
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  maximum effective rate of 18%.
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  And this is where this endowment becomes very valuable.
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  Not only for the lower capital gains, effective capital gains tax rates, but
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  also, like I say,
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  the estate planning tools that this structure provides becomes...
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  very valuable compared to direct offshore holdings where you face siters and probate
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  and all those things.
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  Anyone that's listened to this podcast and listened to your excellent explanations,
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  Ruan, again, at some stage, they're going to say, well,
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  I don't really understand that.
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  It is quite a complex process for a layman.
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  It doesn't matter how much money you've made, when it comes to doing something
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  with that money,
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  these sort of structures aren't easy to grasp first up, I don't think.
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  So this is where I really would encourage somebody to go and see a financial
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  advisor.
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  Would that be your advice as well?
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  Yes, 100%.
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  We've seen a couple of cases where you get some DIY investors and eventually
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  somewhere along the line,
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  the buck drops and something falls on the floor.
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  So I think there's value in having the right advice in your arsenal to approach
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  investing offshore.
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  Very good, Rowan.
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  Thanks very much for your advice, Rowan Britt.
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  It's from Brenthurst Wealth in the Western Cape, and that was It's My Money.
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  It's My Money was brought to you by Brenthurst Wealth, an award-winning
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  boutique wealth management company.