Why transferring your shares to an offshore Trust is not that simple

So, these days it seems everyone in South Africa wants to set up an offshore trust. You might have heard over a “braaivleis-vuur” that your friend has an offshore trust to which she has transferred her assets and now everything is just peachy, with all her assets in hard-currency abroad and no nasty taxes applying.

Well, in reality, utilising an international trust is not that simple. There are certainly a lot of good reasons to set up an offshore trust as discussed in our previous newsletter one of the most popular reasons being estate planning.

The problem is that people think they can just transfer their assets to a trust and there you go, magically, tax disappears.  The reality is of course, not that simple. The first issue is how you actually transfer the assets to the trust. In South African law the “transfer” can only be classified as either a “donation” or a “loan”, both of which have tax implications.

As soon as you hear the word “donation” we need to consider donations tax. You will be liable for 20% donations tax up to the amount of R30 million donated over your lifetime, and 25% on any amounts above R30 million. If you have donated an asset rather than cash, the market value of the asset will be used to calculate the donations tax.

Once you have donated the cash or asset to a foreign trust, in terms of the settlor-attribution rules, all income and gains made by the foreign trust as a result of that donation, will then be taxed in your hands in South Africa, until you die or emigrate. Harsh, but true!

So donating funds or assets to a trust might not be such a good idea.

Your other option is lending the funds to the trust to be able to buy the asset or else selling the asset on loan account to the trust. In either case, the interest rate on the loan needs to be considered. As you will most likely be a beneficiary of the trust, or your spouse and/or kids will, the famous transfer pricing provisions will kick in and the loan would need to bear a market related i.e. an arm’s length interest rate. Determining the market related interest to be charged can be a very complex exercise, as discussed in another previous newsletter and this calculation adds another layer of hassle to the funding of the trust. And of course then you will end up paying South African tax on the interest received or deemed to be received from the foreign trust.

Disposing of an asset to a trust will also result in a capital gains tax event in your hands, meaning more taxes payable in order to fund the trust. The capital gain would also need to be calculated on the market value of the asset that you want to “transfer” to the trust, as again, you will more likely than not be connected to the trust as a beneficiary or through your family members who are beneficiaries.

If the “braaivleis-vuur” advice that you received from your friend include putting your South African shares into a foreign trust, you need to consider the possible Securities Transfer Taxes on the transfer of South African shares.

Another interesting consideration is the infamous “loop” provisions for Exchange Control purposes. See our newsletter where the Reserve Bank created a false hope to South African Exchange Control residents that the loop provisions were repealed. Well, the reality in practice turned out to be much more complicated than the mere discarding of the loop provisions. Although possible to get loop structures approved or rather “placed on record”, the hoops that you need to jump through might not be worth it.

Beware of tax planning advice you hear at braais! Establishing a foreign trust to hold your assets is complex, and could get you into trouble if not properly considered and navigated. Please contact us to help you think through all the pitfalls and do proper planning when considering an offshore trust for your assets.