Understanding “offshore” starts with one simple certainty: nothing in the South African Income Tax or Reserve Bank regulations prohibits South Africans from opening a bank or investment account, or setting up an offshore trust. In fact, placing money offshore is often a prudent financial strategy. Exposure to international assets offers three vital benefits. It hedges against rand depreciation, enables portfolio diversification, and opens up access to a broader range of investment opportunities.
In most cases, opening an offshore bank account makes sense early on – especially for individuals earning income abroad or running a business with international exposure. Banking offshore is a relatively straightforward way to begin building financial resilience and global diversification. Setting up an offshore trust, on the other hand, is usually a next-level step. It becomes appropriate when your wealth reaches a certain scale, or when estate planning, intergenerational wealth transfer, or asset protection become key priorities.
Key considerations
1. Wealth accumulation:
Opening an offshore bank account can, and often should, happen early in your wealth journey. However, the establishment of an offshore trust is typically reserved for those with substantial assets. The benefits of asset protection, estate planning, and structured wealth transition can justify the setup costs of trusts.
2. Circumstances:
Having a high tax burden, exposure to litigation risk, or the need to ensure generational wealth may prompt earlier trust structuring. In these cases, an offshore trust offers pre-emptive protection of assets.
3. Choice of jurisdiction:
Not all offshore locations offer the same benefits. Political stability, legal robustness, tax treaties, regulatory transparency, and the reputation of the financial services environment should all be taken into account when assessing a jurisdiction’s suitability.
Offshore bank and investment accounts
While many South Africans make use of foreign currency (CFC) accounts to manage foreign invoices and payments, these accounts remain subject to exchange control regulations and lack true independence. In contrast, offshore transactional accounts allow for the receipt of foreign funds, execution of global payments, and access to funds being held in foreign jurisdictions via debit, credit, or prepaid cards. Funds in such accounts can also easily be transferred into a variety of offshore investment accounts.
When selecting an offshore bank, consider the minimum balance requirements, fees, online access, service reputation, and whether a personal appointment is necessary or a licensed intermediary can assist remotely.
It is also crucial to understand that while offshore earnings might not incur tax in their local jurisdiction, South Africans are taxed on worldwide income, interest and capital gains. Tax compliance is increasingly being automated under Common Reporting Standards (CRS), meaning that balances, interest and dividends are automatically reported to SARS via offshore banks.
Offshore Trusts
Knowing when to move from simply holding funds offshore to placing them in an offshore trust is an important strategic decision. While offshore accounts offer flexibility and convenience, trusts are designed for long-term wealth protection and legacy planning.
For some, the need arises from wanting to preserve assets across generations. Others look to trusts to shield their wealth from divorce or creditor claims, or to provide for children with special needs. Trusts are also useful when it comes to assets that cannot be easily split – like property – or when there is a clear need to separate personal wealth from business interests. In many cases, a trust offers an added layer of fiduciary oversight, especially when beneficiaries may not be financially experienced or able to manage money independently.
Of course, these benefits come with costs, and timing is everything. If you are considering setting up a trust, it is essential to weigh the returns of the underlying investment against the annual trustee and administration fees. As a benchmark, the fees for a basic Mauritius trust (typically the lowest starting point) start at around USD2,000 a year. If the returns on your offshore assets do not comfortably cover such costs, it may be worth waiting until your portfolio has grown before establishing a trust.
Other beneficial trust jurisdictions include Guernsey, Isle of Man and Gibraltar. And, with much wealth expanding into the East, trusts regulated by the laws of Singapore and Hong Kong have also seen an increase in popularity.
Moving your wealth offshore is not a decision to be taken lightly. It must be built on a foundation of sound wealth planning. Begin with a bank account, and consider a trust only when you have the scale and need to justify it. Further, you need to weigh up costs, and fully understand the compliance obligations and tax reporting responsibilities.
At Sovereign Trust we always advise investors to partner with professionals before making any decisions about whether to move their money offshore – and how to so most efficiently.
