The cash conundrum

Investing offshore can be intimidating, and holding cash in a foreign bank account is often perceived as an easy way to gain offshore exposure. However, it is likely that the investor’s money won’t grow due to very low interest rates, and on death, it can be complicated and costly to deal with this asset.

The investor’s cash could show little or no growth over time.

Depending on where the bank account is held, offshore probate may apply on the death of the investor. This means that an overseas agent, similar to a South African executor, may have to be appointed to deal with the bank account, which could be a lengthy and expensive process.

Overseas inheritance tax may also apply, which can be as high as 40%, depending on the country where the account is held. What’s more, estate duty may be payable in South Africa as the worldwide assets of a South African resident are subject to this tax. There may be a double taxation agreement between the countries that could provide some relief, but it’s still possible that the higher foreign inheritance tax will be applicable.

The foreign bank account will be frozen while the estate is being finalised. This process can be lengthy and the deceased’s family and dependents will not be able to access the cash until the estate has been wound up.

Bearing this in mind, a foreign bank account may be useful for those going on an overseas vacation in a few months’ time or to meet other short-term offshore funding needs. It is key to obtain financial advice to ensure proper estate planning in respect of all your assets. For those investors who are looking to build up an offshore nest egg over time, there may be other, more efficient investment options to consider.

Our offshore solution, Investec GlobalSelect Access,1 provides simplified, flexible access to offshore markets. Investors can choose from a wide range of unit trust funds, which include money market and income funds. Because the funds are held in a policy, they offer a host of benefits:

Investors don’t have to worry about personal tax reporting. Investec Assurance Limited (IAL) takes care of all the tax administration by calculating and paying any tax due on behalf of investors.
No income tax is applicable, only capital gains tax (CGT) when switching funds or selling units. This is because the underlying investments are in roll-up funds, so interest income and dividends are not distributed – investment income is capitalised. What’s more, CGT is taxed at a rate of only 12%, versus a maximum effective rate of 18% for investments not wrapped in a policy. So, there may be attractive tax benefits for investors being taxed at a higher marginal rate when investing in a unit trust fund via our offshore policy.

Investors can nominate a beneficiary who will receive the benefits on their death, thereby avoiding some of the offshore estate costs associated with foreign bank accounts and offshore unit trust funds that are not held in a policy.
There is no need to appoint a foreign agent to deal with this asset if there is a nominated beneficiary, and no offshore inheritance tax2 nor South African executor fees will be payable. However, estate duty may apply in South Africa.
On the death of the investor, the proceeds of the policy will be exempt from CGT, if the policy is transferred to the nominated beneficiary.
After transfer, the beneficiary will have immediate access to the investment and no investment term will apply.

Choosing a suitable fund
As mentioned earlier, foreign cash may be prudent for some investors as a short-term parking facility. But it is all too common for investors to have ‘lazy’ money in a foreign bank account for an unspecified period. Holding foreign cash rather than a diversified basket of assets can be risky, as investors are purely exposed to the exchange rate, which can be volatile.

Read the full article: https://www.investecassetmanagement.com/south-africa/individual-investor/en-za/insight/investment-views/the-cash-conundrum 

December 13 2019 By Albert Coetzee - Co-Head of Sales Investec IMS