The hidden lever in investing – why tax efficiency and legacy planning matter

Investing in your personal capacity offers simplicity, transparency and full control, with minimal administrative barriers. It is often well-suited to early-stage wealth accumulation.

However, this comes with full tax exposure: income taxed at marginal rates (up to 45%), capital gains taxed at 18%, and dividends taxed at 20%. Assets also form part of the dutiable estate, potentially creating estate duty and liquidity pressures at death. Foreign investments may further introduce situs tax exposure.

Tax-efficient options include tax-free investments (which should be maximised annually), roll-up unit trusts (deferring tax until disposal), structured products and wrappers such as endowments or sinking fund policies, which can reduce effective tax rates and provide protection against foreign situs taxes.

South African trusts introduce separation between individuals and assets, supporting estate planning, asset protection and controlled intergenerational transfers. This flexibility can be valuable as family dynamics evolve.

However, trusts are taxed at higher rates unless the conduit principle is applied, allowing income and gains to be taxed in the hands of South African resident beneficiaries, although this increases their estate duty exposure. Retaining profits within the trust mitigates estate duty exposure but results in higher annual taxation. You should also watch out for funding costs.

Trusts also involve administrative complexity and ongoing governance. From an exchange control perspective, they cannot directly hold foreign assets and typically require asset swap structures to gain offshore exposure. Investment wrappers can help reduce the need for annual distributions where beneficiaries are individuals.

Offshore trusts are commonly used for diversification, currency management and long-term wealth planning. They can provide access to jurisdictions with tax efficiencies or deferral opportunities within the structure and offer the potential for smoother long-term compounding in selected environments, as well as estate-planning advantages when funded and administered in specific ways. If the funding of an offshore trust is structured correctly, it can be tax efficient from a South African perspective, with South African tax triggered only upon distribution to South African-resident beneficiaries. Offshore trusts also protect from most foreign situs taxes, though with notable exceptions, such as the UK and France.

However, these benefits come with trade-offs: higher setup and administration costs, increased regulatory and reporting requirements, exposure to foreign tax regimes and reduced direct control over assets. The funding mechanism used for the offshore trust is an important consideration and requires specialist advice.

Unlike local trusts, offshore trusts generally do not face exchange control investment restrictions unless they invest back into South Africa. They are typically appropriate for larger, more complex estates and longer-term planning objectives.