Offshore Trusts for South Africans
Offshore trusts offer South Africans increased control, protection and long-term planning opportunities for their wealth. The right structure can safeguard assets, streamline succession and avoid probate delays, but outcomes depend heavily on jurisdiction, management, funding and how distributions are handled.
At its simplest, a trust is an arrangement whereby property or assets are transferred from one person (the ‘settlor’) to another person (the ‘trustee’) to hold the property for the benefit of a specified list or class of persons (the ‘beneficiaries’).
The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries.
A properly established offshore trust is a sound, legal structure that can be used effectively to help South African families achieve a wide variety of financial planning goals, while protecting and preserving wealth on an intergenerational basis.
Offshore trusts offer a wide range of practical advantages – particularly for individuals who are changing, or planning to change their residence or domicile, those with family members resident abroad, those seeking asset protection and those wishing to dispose of their estate on death freely being subject to forced heirship rules or probate.
The basic premise of any offshore structure – whether it’s a trust, company, partnership or fund – is that it should be resident in, and controlled and managed from, a location that is outside the place of residence of its owner or owners. It is therefore a ‘non-resident’ or overseas entity.
Non-resident structures may offer a more secure and stable legal platform, facilitate the diversification of investments or provide a means to eliminate forced heirship rules or probate in the country where an asset is based. They do not, however, change the tax or reporting obligations of owners or investors.
Choosing the right jurisdiction
Many offshore trusts are based in tax-neutral jurisdictions, but choosing the right jurisdiction is critical because the benefits of the offshore trust and the effective administration of the offshore trust by the trustees will be impacted if the trust is established in a jurisdiction that is black or grey listed by the Financial Action Task Force (FATF) for money laundering deficiencies or the European Union for harmful tax regimes.
Other important factors to consider when choosing a jurisdiction include a strong tradition of enforcing trusts, an English common law system, effective regulation and supervision, good banking infrastructure, economic and political stability, a wide network of double taxation agreements (DTAs) and good accessibility.
Sovereign generally recommends that trusts are established in Mauritius, the Isle of Man, Gibraltar, Guernsey, Cyprus, Malta, Hong Kong and Singapore. Sovereign is fully licensed to act as professional trustees in all these jurisdictions.
Trust management and control
Assets transferred into trust are no longer regarded as belonging to the settlor, so the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the trustee(s).
Based on the definition of the term ‘resident’ a legal person, such as a company or a trust, will be a non-resident if it is not incorporated, established or formed in South Africa and does not have its place of effective management in South Africa.
The place of effective management in the case of a company is the place where it is managed on a regular or day-to-day basis by the directors or senior managers of the company, irrespective of where the overriding control is exercised, or where the board of directors meets.
For an offshore trust to qualify for any beneficial tax treatment in a specific jurisdiction, the trust must be managed and controlled from that jurisdiction and the trustee must be a tax resident in the jurisdiction.
In reputable offshore jurisdictions, professional trustees must be licensed and regulated by the local financial services regulator. A trustee serves in a fiduciary capacity; they must act prudently in the management of trust property and will be liable for breach of trust if – by failing to exercise proper care – the trust fund suffers loss.
In the case of a professional trustee, the standard of care that the law imposes is higher. This duty can extend to supervising the activities of a company in which the trustees hold a controlling shareholding.
Structuring and funding a trust
Many kinds of assets can be put in trust, including cash, property, shares and land. South African exchange control residents can use their annual ZAR12 million foreign personal investment allowances to fund offshore trusts outside the Common Monetary Area (CMA) – South Africa, eSwatini, Lesotho and Namibia – per calendar year.
This is comprised of the annual ZAR2 million Single Discretionary Allowance (SDA) and the annual ZAR10 million Foreign Investment Allowance (FIA). A couple, who are both South African tax residents with their own allowances, can therefore potentially move up to ZAR24 million combined per calendar year.
Trusts can also be funded by the settlor lending assets to the trust rather than making a gift. A loan trust is typically used for individuals who want to start estate planning, but either don’t feel comfortable about gifting away capital they might need it at some point in the future or where the act of gifting might trigger adverse donations tax consequences.
The trustees then invest this money, typically into an investment bond, for the benefit of the trust beneficiaries. The settlor can demand repayment of the outstanding loan at any time – either in full or in part – but any fund growth must be used for the benefit of the trust beneficiaries.
It is essential that a loan must adhere to the provisions of sections 7 and 31 of the Income Tax Act, which stipulates, among other things, that such loans must be made at an arm’s length interest rate.
Planning distributions effectively
Offshore trust distributions received by South African resident beneficiaries may be taxed in the hands of the recipient. The tax treatment of income and capital distributions will be different, so any distributions should be reviewed and assessed in advance by your tax consultant.
However, South African tax obligations only arise where distributions are made from the trust. Income can be retained in the trust and used for foreign investment without generating South African tax liabilities.
Offshore Trusts for South Africans living abroad who might return to South Africa
Many high-net-worth South Africans living and working abroad intend to return to South Africa at some point, whether prompted by family ties, lifestyle choices or local business opportunities. But returning to South Africa carries significant financial consequences, particularly when it comes to the preservation of offshore wealth.
If properly structured and funded before residency is re-acquired, trusts are one of the most strategic tools available to returning families. By establishing and funding an offshore discretionary trust while still non-tax resident in South Africa, the assets held in trust are removed from the settlor’s personal estates for South African tax purposes.
Foreign trusts help to preserve wealth across generations by avoiding probate and maintaining confidentiality. This protects against South African estate duty and shields future capital gains from being taxed locally. And, because assets can be held in multiple currencies, they can shield family wealth from the volatility of the Rand.
Please contact us if you have any questions or queries and your local representative will be in touch with you as soon as possible.
